Edgar Filing: HSBC HOLDINGS PLC

Prepared and filed by Bowne

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

For the month of August, 2007

HSBC Holdings plc
42nd Floor, 8 Canada Square,
London E14 5HQ,
England

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F

Form 40-F

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-___

This Report on Form 6-K with respect to our Interim Financial Statements and Notes thereon for the six-month period ended June 31, 2006, other than page 149 thereof, is hereby incorporated by reference in the following HSBC Holdings plc registration statements: file numbers 333-10474, 333-92024, 333-102027, 333-103887, 333-104203, 333-109288, 333-113427, 333-127327, 333-126531 and 333-135007.

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H S B C H O L D I N G S P L C

Interim Report 2007

Headquartered in London, HSBC is one of the largest banking and financial services organisations in the world. Its international network comprises over 10,000 properties in 83 countries and territories in Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa; North America and Latin America.

With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by about 200,000 shareholders in over 100 countries and territories. The shares are traded on the New York Stock Exchange in the form of American Depositary Shares.

HSBC provides a comprehensive range of financial services to more than 125 million customers through four customer groups and global businesses: Personal Financial Services (including consumer finance); Commercial Banking; Corporate, Investment Banking and Markets; and Private Banking.

Contents

	Page

Financial Highlights	1

Group Chairman’s Statement	4

Group Chief Executive’s Review	6

Business Review¹	11

Financial Review¹	73

The Management of Risk¹	93

	Page

Board of Directors and Senior Management	129

Financial Statements	132

Notes on the Financial Statements¹	136

Additional Information	157

Glossary of Terms	169

Index	170

1	Supplementary contents are provided on the referenced pages.

Certain defined terms

Unless the context requires otherwise, ‘HSBC Holdings’ means HSBC Holdings plc and ‘HSBC’ means HSBC Holdings together with its subsidiaries. Within this document, the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. When used in the terms ‘shareholders’ equity’ and ‘total shareholders’ equity’, ‘shareholders’ means holders of HSBC Holdings ordinary and preference shares classified as equity.

The Interim Report 2007 of HSBC Holdings has been prepared in accordance with the requirements of English law, and liability in respect thereof is also governed by English law. In particular, the liability of the Directors for these reports is solely to HSBC Holdings. HSBC’s interim Financial Statements and Notes thereon, as set out on pages 132 to 155, have been prepared in accordance with International Accounting Standard (‘IAS’) 34 ‘Interim Financial Reporting’. HSBC prepares its annual consolidated financial statements in accordance with International Financial Reporting Standards (‘IFRSs’) as endorsed by the European Union (‘EU’). At 30 June 2007, there is no difference between IFRSs as endorsed by the EU and IFRSs as issued by the International Accounting Standards Board (‘IASB’) in terms of their application by HSBC.

HSBC uses the US dollar as its presentation currency because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts its business. Unless otherwise stated, all figures are presented in this document on a consolidated basis.

When reference is made to ‘underlying’ or ‘underlying basis’ in tables or commentaries, comparative information has been expressed at constant currency (see page 3) and adjusted for the effects of acquisitions and disposals.

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H S B C H O L D I N G S P L C

Financial Highlights

For the half-year

•	Total operating income up 23 per cent to US$42,092 million (US$34,334 million in the first half of 2006).

•	Group pre-tax profit up 13 per cent to US$14,159 million (US$12,517 million in the first half of 2006).

•	Profit attributable to shareholders of the parent company up 25 per cent to US$10,895 million (US$8,729 million in the first half of 2006).

•	Return on average invested capital of 18.4 per cent (17.2 per cent in the first half of 2006).

•	Earnings per share up 22 per cent to US$0.95 (US$0.78 in the first half of 2006).

Dividends and capital position

•	Tier 1 capital ratio of 9.3 per cent and total capital ratio of 13.2 per cent.

•	Second interim dividend for 2007 of US$0.17 per share which, together with the first interim dividend for 2007 of US$0.17 per share already paid, represents an increase of 13 per cent over the first and second interim dividends for 2006.

Cautionary statement regarding forward-looking statements

This Interim Report 2007 contains certain forward-looking statements with respect to the financial condition, results of operations and business of HSBC. These forward-looking statements represent HSBC’s expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. For example, certain of the market risk disclosures, some of which are only estimates and, therefore, could be materially different from actual results, are dependent on key model characteristics and assumptions and are subject to various limitations. Certain statements, such as those that include the words ‘potential’, ‘value at risk’, ‘estimated’, ‘expects’, ‘anticipates’, ‘objective’, ‘intends’, ‘plans’, ‘believes’, ‘estimates’, and similar expressions or variations on such expressions may be considered ‘forward-looking statements’.

Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission (‘SEC’) on Form 20-F, Form 6-K, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials and in oral statements made by HSBC’s Directors, officers or employees to third parties, including financial analysts.

Forward-looking statements involve inherent risks and uncertainties. Readers should be cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. Forward-looking statements speak only as of the date they are made, and it should not be assumed that they have been reviewed or updated in the light of new information or future events. Trends and factors that are expected to affect HSBC’s results of operations are described in the ‘Business Review’, the ‘Financial Review’, and ‘The Management of Risk’. A more detailed cautionary statement is given on pages 4 and 5 of the Annual Report and Accounts 2006.

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H S B C H O L D I N G S P L C

Financial Highlights (continued)

Profitability and balance sheet data
	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

For the period
Total operating income	42,092		34,334		35,736
Profit before tax	14,159		12,517		9,569
Profit attributable to shareholders of the parent company	10,895		8,729		7,060
Dividends	(6,192	)	(5,270	)	(3,499	)
At the period-end
Total equity	126,491		107,370		114,928
Total shareholders’ equity	119,780		101,381		108,352
Capital resources¹	137,042		116,636		127,074
Customer accounts	980,832		833,742		896,834
Total assets	2,150,441		1,738,138		1,860,758
Risk-weighted assets	1,041,540		872,893		938,678

	US$		US$		US$
Per ordinary share
Basic earnings	0.95		0.78		0.62
Diluted earnings	0.94		0.77		0.62
Dividends	0.53		0.46		0.30
Net asset value at period end	10.10		8.71		9.24

Capital and performance ratios (annualised)
	%		%		%
Capital ratios
Tier 1 capital	9.3		9.4		9.4
Total capital	13.2		13.4		13.5
Performance ratios
Return on average invested capital²	18.4		17.2		12.8
Return on average total shareholders’ equity³	19.1		18.1		13.4
Post-tax return on average total assets	1.19		1.12		0.88
Post-tax return on average risk-weighted assets	2.30		2.21		1.65
Credit coverage ratios
Loan impairment charges as a percentage of total operating income	15.0		11.3		18.6
Loan impairment charges as a percentage of average gross customer advances	1.53		1.04		1.73
Total impairment allowances outstanding as a percentage of impaired loans at period end	98.4		92.5		98.5
Efficiency and revenue mix ratios
Cost efficiency ratio⁴	48.3		50.1		52.5
As a percentage of total operating income:
– net interest income	43.3		48.7		49.7
– net fee income	24.9		24.4		24.6
– net trading income	13.1		12.4		11.1
Financial ratio
Average total shareholders’ equity to average total assets	5.9		5.9		6.1


1	Capital resources are total regulatory capital, the calculation of which is set out on page 127.
2	The definition of return on average invested capital and a reconciliation to the equivalent Generally Accepted Accounting Principles (‘GAAP’) measures are set out on page 92.
3	The return on average total shareholders’ equity is defined as profit attributable to shareholders of the parent company divided by average total shareholders’ equity.
4	The cost efficiency ratio is defined as total operating expenses divided by net operating income before loan impairment charges and other credit risk provisions.

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Share information
	At	At	At
	30 June	30 June	31 December
	2007	2006	2006

US$0.50 ordinary shares in issue (million)	11,713	11,481	11,572
Market capitalisation (billion)	US$215	US$202	US$212
Closing market price per ordinary share:
– London	£9.15	£9.52	£9.31
– Hong Kong	HK$142.50	HK$136.10	HK$142.40
Closing market price per American Depositary Share (‘ADS’)¹	US$91.77	US$88.35	US$91.65

	Over 1 year	Over 3 years	Over 5 years
HSBC total shareholder return to 30 June 2007²	101.2	129.1	156.6
Benchmarks:
FTSE 100³	117.1	163.8	168.5
MSCI World⁴	124.2	161.4	197.2


1	Each ADS represents five ordinary shares.
2	Total shareholder return is defined on page 282 of the Annual Report and Accounts 2006.
3	The Financial Times-Stock Exchange 100 Index.
4	The Morgan Stanley Capital International World Index.

Constant currency

Constant currency comparatives for the half-years to 30 June 2006 and 31 December 2006, used in the 2007 commentaries, are computed by retranslating into US dollars:

•	the income statements for the half-years to 30 June 2006 and 31 December 2006 of non-US dollar branches, subsidiaries, joint ventures and associates at the average rates of exchange for the half-year to 30 June 2007; and

•	the balance sheets at 30 June 2006 and 31 December 2006 for non-US dollar branches, subsidiaries, joint ventures and associates at the rates of exchange ruling at 30 June 2007.

No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates.

When reference is made to ‘constant currency’ or ‘constant exchange rates’ in tables or commentaries, comparative data reported in the functional currencies of HSBC’s operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.

Growth in operating income and costs

	Half-year to 30 June 2007 compared with the half-year to

	30 June 2006		31 December 2006
		Constant		Constant
		currency on		currency on
	As	an underlying	As	an underlying
	reported	basis	reported	basis
	%	%	%	%

Growth in net operating income before loan impairment charges and other credit risk provisions	20	15	16	13
Growth in total operating expenses	15	10	7	4

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H S B C H O L D I N G S P L C

Group Chairman’s Statement

HSBC produced record results for the first half of 2007, delivering profit before tax of US$14.2 billion, up 13 per cent, and earnings per share of US$0.95, up 22 per cent.

The Directors have approved a second interim dividend of US$0.17 per share, which will be payable on 4 October 2007 with a scrip alternative, in accordance with our planned schedule of quarterly dividends.

The results were driven by excellent performances across Asia, and in Corporate, Investment Banking and Markets (‘CIBM’) and Commercial Banking, which offset the impact of higher consumer finance impairment charges in the US and a challenging environment for our Personal Financial Services business in Europe.

Our results benefited from two specific items. First, we recognised a gain of US$1 billion in attributable profit, as a result of the dilution of our holdings in our mainland China associates. Excluding this exceptional gain, profit before tax rose by 5 per cent and attributable profit by 13 per cent. Second, our effective tax rate was unusually low at 18.7 per cent in this period. The following comments exclude the impact of the dilution gain.

Revenues grew by US$5.2 billion, or 16 per cent, against cost growth of US$2.5 billion, or 15 per cent, contributing to an improved cost-efficiency ratio of 49.7 per cent.

Asia drove profit growth, with Hong Kong ahead by 25 per cent and Rest of Asia-Pacific by 37 per cent. Latin America and Europe delivered results ahead of the prior year period by 16 per cent and 13 per cent, respectively. As expected, North

America was lower by 35 per cent as a consequence of higher impairment reserves. It is worth noting that our results for the first half of 2006 benefited from exceptionally low impairment charges in the US as a result of changes in US bankruptcy law.

At a customer group level, Commercial Banking delivered pre-tax profits 20 per cent ahead of last year, and both CIBM and Private Banking were at least 30 per cent ahead. Our Personal Financial Services businesses in Asia also delivered very strong results, with pre-tax profits 38 per cent ahead of the interim stage last year. However, pre-tax profits in Personal Financial Services as a whole declined by 20 per cent overall compared with the first half of 2006, owing to challenging conditions in the UK and to the weaknesses we have already highlighted in our US correspondent mortgage business. The actions taken to restructure and manage down our exposure in this business are progressing well. The charge for impairments was lower than in the second half of last year and, importantly, was in line with our expectations.

Within these results, the Group’s Insurance operations made a significant contribution and we see insurance as a growth opportunity for the future.

From a strategic perspective, these results illustrate the value we are creating from our position as the world’s largest and most profitable international emerging markets bank, and from our unique global reach which allows us to act as a bridge between developed and developing markets for our customers.

The strong growth we achieved in operating revenues reflects our focus on seeking out growth markets and has allowed us to continue to invest in organic expansion while maintaining a strong capital position and growing dividends to shareholders.

Average invested capital rose by US$17 billion as we pursued expansion opportunities around the world. Our tier one capital ratio remained strong at 9.3 per cent. We see this as a competitive advantage, particularly in the current economic environment, and in light of the opportunities we see to deploy this capital within our businesses.

In an increasingly globalised world, the success we have reported today is supported by the integrity that is part of our global brand, and which we believe constitutes a distinct competitive advantage. In less than a decade, we have made ‘HSBC’ the 23rd most valuable brand in the world, according to Interbrand, and we are the fastest growing financial services brand. We will continue to invest in developing our brand and the experience it promises

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for the customers and communities we serve around the world. We will also extend our brand to new markets and new business streams.

As I set out earlier this year, we are refocusing our business to make the most of the opportunities presented by three major trends that are reshaping the world economy. First, emerging markets are growing faster than mature economies. Second, world trade is growing significantly faster than world GDP. Third, longevity is increasing around the world.

As a result, we have positioned our business so that it is broadly balanced between Asia, Latin America, the Middle East and other developing economies, and slower-growing developed economies. As the world economy evolves, and trade and investment flows from and into emerging markets expand, HSBC has an excellent platform for growth. It is the linkages between our business operations across 83 countries and territories which deliver unique revenue opportunities and a distinctive competitive position. Increasing longevity is also creating opportunities to grow our insurance and retirement businesses. All these factors contributed to the growth we delivered in the first half of 2007.

I want to thank all my colleagues for their contribution to these results. Our progress is clear evidence of the value we are delivering through our strategy of joining up the company for our customers, our shareholders and our people.

As the world’s local bank, our responsibilities extend beyond how successfully we run our business. Climate change is one of the most significant issues of our time, which is why we announced in May the US$100 million HSBC Climate Partnership, working with four world-class organisations to support initiatives by individuals, businesses and governments around the world to address this issue. I am also delighted that Sir Nicholas Stern – author of the Stern Report on the economics of climate change – has agreed to become an adviser on economic development and climate change to HSBC.

Outlook

The world economy remains remarkably buoyant. There is growing evidence of economic decoupling, with US weakness not constraining economic activity elsewhere. Even in the US, which faces considerable housing and sub-prime-related difficulties, consumer spending has remained encouragingly robust and the labour market has been firm. The financial markets continue to enjoy record

levels of activity, though muted in the past couple of months by nervousness about credit markets, and more sophisticated product structuring and risk management services are enabling the diversification and spread of risk on an unprecedented scale. This buoyancy is supporting economic activity.

We estimate that global growth this year will be close to last year’s 3.8 per cent. We believe emerging markets will remain particularly strong, stimulating global demand for capital goods, providing an economic boost to Germany, Japan and other major exporters. The weakness in the housing market is likely to hold back US growth for 2007, which may be as low as 2 per cent.

There are risks, however. Excess liquidity in global financial markets could lead to further asset price dislocation. Perceptions of risk can change very rapidly, affecting both credit spreads and liquidity, and history shows that when market participants simultaneously seek to adjust risk exposures, market instability can follow. Among the potential triggers are higher global interest rates with a return to higher inflation, moves towards protectionism and greater spillover effects from US housing market weakness. HSBC has always emphasised balance sheet strength to maintain strong liquidity and a sound capital base to take advantage of opportunities that arise in such circumstances. We remain cautious in our risk appetite.

Our strategy is clear. We have well diversified earnings by both geography and customer. Our distribution network provides compelling opportunities for serving our customers around the world. We will continue to improve both customer experience and operating efficiency through technology, especially in our direct channels. The outlook for HSBC is buoyed by our expectation of continuing strong growth in our developing markets businesses and their greater linkages internationally. We are on a journey with great opportunities to build on our strong current position, and I look forward to reporting our future progress.

Stephen Green, Group Chairman
30 July 2007

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H S B C H O L D I N G S P L C

Group Chief Executive’s Review

Our first half results demonstrate sustainable growth and significant progress in working through the challenges of sub-prime lending, whilst also unlocking real value from our world-class distribution network through ‘Joining up the company’.

The world’s largest and most profitable international emerging markets bank

Our emerging markets operations continue to perform exceptionally well. We prioritise investment in growing these businesses organically and we continue to extract value from strategic investments. This month our integration of Grupo Banistmo continued as we rebranded operations to HSBC in five Latin American countries.

We have a strong presence in the world’s most dynamic economies. In the BRIC countries – forecast to account for 40 per cent of world growth by 2025 – we are the largest international bank in mainland China, the second largest and growing impressively in India, and the third largest in Brazil. In Russia, we received a banking licence in May to start retail banking activities.

Joining up the company for our customers

The breadth of our international network means we can offer our customers compelling global propositions that cannot be matched by purely domestic or regional competitors. Increasingly, we are joining up our businesses for our customers across borders and across businesses. Our Corporate, Investment Banking and Markets (‘CIBM’) business achieved record results for the period by successfully

executing its emerging markets-led and financing-focused strategy. Our Commercial Banking business also grew strongly as customers benefited from our international orientation and the direct channels we are building for them.

Personal Financial Services’ profit before tax declined by 20 per cent, largely as a consequence of our experience with sub-prime correspondent mortgages in the US and weakness in the UK. Meanwhile in Asia, pre-tax profit grew by 38 per cent.

We are increasingly connecting this business globally and in May rolled-out in 35 countries our market-leading Premier proposition – a signature account for international HSBC Premier customers. First indications are encouraging and there is an opportunity to gain significant global market share in this valuable segment. We believe that, over time, we will add four million new mass-affluent customers.

Private Banking achieved very strong results and continued to leverage closer links with other customer groups, particularly Commercial Banking, generating almost US$2 billion in total client assets from referrals. When our investment business recently launched the first multi-manager Chinese equity fund in Hong Kong, we were able to raise over US$1 billion from our retail and private banking customer base in the region.

We also benefit from the ability to deliver global world-class propositions for our customers through the effective use of our technology. By building core systems for use across the Group, we can share the development and support costs across our operations, close down old systems, and share best practice in sales and service.

In our cards business, the introduction of our Whirl global credit card platform across the world, which now services 86 million accounts across 16 countries, has allowed us to improve services for our card customers and to cut our IT costs per account by 16 per cent. We are adding 40,000 credit card customers to the system each day.

We are also introducing a new personal and business internet platform across the Group. This has been implemented in 25 countries so far. Internet sales have risen 68 per cent compared to the first half of 2006. The new infrastructure is allowing us to launch new services, including direct banking. Following earlier successes in the US and Taiwan, HSBC Direct, our online direct banking and savings proposition, was launched in South Korea and Canada during the first half of 2007. In Asia, the

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service has attracted over 120,000 customers, with total savings balances exceeding US$900 million. The US business has continued to perform strongly; online savings balances have now reached US$12 billion with over 225,000 new accounts added this year. One of the compelling features of the HSBC Direct model is that it allows us to attract new customers who we do not reach through our existing channels. We continue to develop the HSBC Direct model, with a view to rolling it out in other markets.

In Latin America, we are introducing HSBC’s systems into the newly acquired Grupo Banistmo companies, starting with Panama. We are also implementing HSBCnet throughout Latin America to provide a full cash management system across the region.

Number one international bank in Asia

We produced record results in Asia. Profit before tax grew impressively in all our major markets, with our operations in Hong Kong up by 25 per cent, our businesses in mainland China by 69 per cent, in India by 39 per cent, in Indonesia by 115 per cent, in Malaysia by 13 per cent and in Singapore by 44 per cent.

Hong Kong produced very strong results. As a result of its leading position in wealth management, our business there was well-positioned to benefit from the buoyant stock market activity during the period and the steady flow of mainland China companies listing on the Hong Kong Stock Exchange. We also continued to leverage our position as the leading financial institution in Hong Kong in trade finance and in insurance. Increased foreign investment through Hong Kong into mainland China boosted Hong Kong’s services and property sectors, and provided further opportunities for HSBC to generate revenue growth.

Strong domestic interest in stock market investments within mainland China also encouraged listings on the Shanghai Stock Exchange during this period, and our three associates, Bank of Communications, Ping An Insurance and Industrial Bank, all successfully raised new capital. The resulting dilution of our interests was considerably less than our share of the new monies raised, and our results reflect aggregate gains at the attributable profit level of some US$1 billion, or US$0.09 per share, which should be regarded as exceptional.

We reinforced HSBC’s position as the leading international bank in mainland China. Our domestic operations in mainland China, following local incorporation, grew strongly, with deposit and asset

growth of over 50 per cent and 26 per cent respectively, compared with the same period last year. Pre-tax profits grew by 69 per cent to US$473 million. We added seven outlets to what is already the largest international branch network and recruited over 800 new staff to support business growth.

In India, strong performance in CIBM drove the 39 per cent rise in profit before tax. We significantly expanded our customer base and continued to invest heavily in growing our business organically, particularly in consumer finance, while maintaining a largely unchanged cost efficiency ratio at 55 per cent.

In Indonesia, where we are also investing in developing our consumer finance business and opened 20 new outlets in the period, profit before tax grew 115 per cent to US$58 million. In Vietnam, a market with great long-term potential, we agreed to increase our stake in Techcombank and we are also growing our own business rapidly there. We grew profit before tax by 117 per cent to US$21 million in the first half, and increased headcount by a third.

Across Asia as a whole, our Commercial Banking business performed very well, thanks in part to our success in growing the customer base. Commercial Banking customers in Asia have increased by 6 per cent in the past year, with particularly strong growth in mainland China and South Korea.

Our success in Asia is being driven in large part by our success in joining up the Group to leverage skills transfer and international reach. In particular, in our investment business, our Asian operations are capturing the leading share of securities services revenues from custody and administration for international funds groups. Reciprocally, we are producing developing market products, both for our own asset management group and for third parties to distribute in the developed world. Similar linkages exist in capital markets activities, remittance services, cross-referral of commercial customers transacting overseas and in consumer finance expansion throughout Asia.

Integration and development in Latin America on track

Profit before tax for Latin America grew by 16 per cent. From a handful of offices a decade ago to some 4,000 in the region today, our operations now account for 8 per cent of Group profit. We are one of the largest international banks in the region, and we continue to develop our businesses in our major

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H S B C H O L D I N G S P L C

Group Chief Executive’s Review (continued)

markets in Mexico, Brazil, Argentina and now across Central America. This was the first complete half-year contribution from Grupo Banistmo, the leading bank in Central America, following its acquisition in 2006. Pre-tax contribution of US$49 million was in line with our expectations and integration is proceeding well.

Improved credit performance in Brazil, coupled with strong asset growth, contributed to a rise in pre-tax profit of 43 per cent. Growth in secured lending and invoice financing has set the scene for sustained revenue growth, and insurance sales in the existing customer base were also stronger.

Revenue growth in Mexico remained strong at just over 23 per cent as we improved market share. We have built a highly successful business in the last five years, which has already returned profits in excess of our total investment. In the first half of 2007, customer acquisition grew at a higher rate than forecast, and related costs affected profits through a rise in provisions which largely offset the expansion in revenues. HSBC in Mexico continued to build market share with credit cards, Tu Cuenta packaged accounts and Premier accounts all growing by over 45 per cent compared with the previous year.

In Argentina, the successful integration of Banca Nazionale del Lavoro, a well-timed acquisition in May 2006, contributed to a 14 per cent rise in pre-tax profits to US$95 million. Once again CIBM, working with local management, helped HSBC in Argentina maintain leading positions in foreign exchange and trade services for multinational companies operating there.

Benefiting from organic growth in the Middle East

Our Middle East businesses, excluding Saudi Arabia, grew strongly, with profit before tax up by 31 per cent. Our operations in the United Arab Emirates and in Egypt performed well as the region expanded its infrastructure development and its outward investment, supported by sustained high oil prices.

Commercial Banking enjoyed higher revenues as a result of the region’s high growth and increased trade flows. High liquidity in the region and demand from institutional customers led to strong sales of structured derivatives and other products in CIBM.

The rollout of additional branches and customer service units, the expansion of the direct sales force and sales of Premier products drove increased personal customer numbers and higher revenues.

The contribution from Saudi Arabia was, however, lower as the stock market declines which

occurred in the second half of last year dampened market activity in the first half of 2007.

Europe: investing in emerging markets and strong returns from UK Commercial Banking

Within emerging Europe, profits in Turkey grew by 34 per cent, even as we opened 25 new branches and installed 101 ATMs to develop our retail platform. Further expansion is planned for the second half of the year. We obtained a licence to begin retail business in Russia, where we aim to open over 35 branches in the next three years.

We intend to expand our operations in Poland, the Czech Republic and Slovakia for personal customers, and we are looking at other markets in Central and Eastern Europe. We will also be opening more branches in Armenia, expanding in Kazakhstan, and we have applied for a licence to begin operations in Georgia.

In continental Europe, our French operations were strongly ahead of the comparable prior period, with profits growing by US$219 million, driven by CIBM revenue growth.

UK Commercial Banking continued to perform well. Profit before tax rose by 18 per cent, our customer base expanded, and we are now the bank most recommended by our start-up customers. Investment in technology is improving customer service and productivity; the successful positioning of Business Direct has attracted over 40,000 customers since its launch in September 2006, of which 60 per cent are new to the Group.

Our Personal Financial Services business in Europe was, however, 34 per cent down on the comparable period in 2006. This was largely due to two factors. First, a deliberate reduction in credit exposure to sectors whose pricing, in our view, inadequately reflects risk. Second, the impact in the UK of unauthorised overdraft fee refunds, which increased our costs by US$236 million. This is an industry-wide issue and the size of the refunds that we have made demonstrates our commitment to treating our customers in a fair and transparent manner. Indeed, we very much welcome the agreement with the Office of Fair Trading to take the case to court to achieve legal clarity and a resolution for our customers and our business. In Group terms, our Personal Financial Services business in the UK typically represents less than 7 per cent of our worldwide profits.

Nevertheless, this remains a highly challenging operating environment. We continue to focus on customer acquisition and retention, and we see

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growth opportunities in wealth management and insurance to counterbalance the challenges posed by competition and regulation for current account pricing.

We grew strongly in packaged fee-based accounts, in Premier accounts, and in retail savings products, which helped to offset the reduction in lending margin. Average savings balances increased by 14 per cent in the first half to US$83 billion. In First Direct we have the UK’s most recommended bank – for every one of the 15 years the measure has existed – and we will learn from its expertise as we build direct channels around the world.

Good progress in managing down the mortgage services portfolio in North America

Within North America, our Canadian and Bermudian businesses grew pre-tax profits by 22 per cent and, although our US businesses were 43 per cent below the pre-tax performance achieved in the first half of 2006, they recovered strongly against the second half of last year, delivering pre-tax profits of US$1.8 billion – an improvement of US$1.5 billion.

This recovery in profitability reflected the success of the steps we have taken to manage loss exposure within the correspondent channel mortgage business. There was no significant change to the levels of loan impairment reserves established at the end of last year. Credit impairment charges in mortgage services in the half year were US$760 million and we wrote off loans of US$715 million against allowances already raised. As a result our impairment allowances remained largely unchanged at US$2.1 billion. We have stopped underwriting sub-prime mortgages within the mortgage services correspondent business, centralised collection activities at one centre for the most at-risk customers, made management changes in key accountabilities, and put in place a proactive calling programme to reach out to customers facing interest rate resets in the coming months. In contrast to many lenders, we are able to manage these relationships directly because we own the loan and the servicing. This means that we can have a more positive dialogue with customers and can actively manage our portfolio in this challenging environment. Since we started the contact programme at the end of 2006, we have contacted 19,000 customers, and have modified the loans for over 5,000 of them, benefiting both our customers and our business.

With the benefit of a resilient US economy, we have managed down the mortgage services exposure

to US$41.4 billion, a reduction of some US$8 billion from the beginning of the year, a trend we hope to continue in the second half. We have also managed down the value of resets in the mortgage services portfolio due in the second half by almost a quarter to US$5.3 billion.

The remaining US consumer finance businesses continued to meet expectations, led by branch-based consumer lending. There is growing evidence that the reduction of capacity in the sub-prime mortgage industry, coupled with curtailment of most of the structured ‘affordability’ products offered, is leading to more disciplined underwriting and pricing across the industry. This is reducing acquisition costs and improving customer retention. As a result, our US consumer finance revenues were 2 per cent and 5 per cent higher compared with the first and second halves of 2006, respectively.

In our US retail bank, we continued to expand beyond residential mortgage lending. We are growing our branch network in California, Connecticut, New Jersey, Florida and the Metro DC Area, and continuing to roll out HSBC Direct, our highly successful online business.

Record results in CIBM reflecting focus on emerging markets and financing

Our strategy of positioning our CIBM business as emerging markets-led and financing-focused is paying off, with profits growing by 32 per cent to a new high of US$4 billion. Asian (including Middle Eastern) and Latin American operations contributed 49 per cent of CIBM’s pre-tax profits in the first half of 2007.

In Asia, success in financing and providing structuring and hedging solutions for the growing investment flows into and from the region, together with growth in traditional foreign exchange and securities activities, delivered an additional US$479 million of pre-tax profits, a rise of 36 per cent. Europe also achieved strong growth as CIBM’s product hubs in London and Paris delivered a full spectrum of products both within Europe and to the global HSBC network.

Especially encouraging was the growing number of notable mandates in sizeable cross-border financing transactions which leveraged HSBC’s presence in both countries. These included: Saudi Basic Industries Corp.’s US$11.6 billion acquisition of GE Plastics; Singapore Telecommunications Ltd.’s US$758 million acquisition of 30 per cent of Warid Telecom (Pvt) Ltd. of Pakistan; National Titanium Dioxide Co. of Saudi Arabia’s US$1.2 billion acquisition of Lyondell Chemical

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H S B C H O L D I N G S P L C

Group Chief Executive’s Review (continued)

Co.’s inorganic chemicals business in the US; and Dubai Drydocks’ S$650 million acquisition of Pan-United Marine Ltd. of Singapore.

HSBC also acted as lead arranger of financing facilities for Macquarie of £1.8 billion for the acquisition of O2 Airwave and £3.4 billion for the acquisition of National Grid Wireless.

We were pleased to be recognised in industry awards: HSBC was named global ‘Best Risk Management House’ in the Euromoney magazine 2007 Awards for Excellence. We also won global ‘Best Cash Management House’ in the Euromoney awards. In debt capital markets, HSBC ranked first in the Asian local currency Bloomberg bond league table, first in the sterling bond league table and sixth in the international bond league table.

Developing our income stream in Insurance

Less than 15 per cent of HSBC customers currently take an insurance product from us. Our insurance operations across our customer groups are making an important contribution to the Group and we believe that insurance has the potential over time to represent a fifth of Group pre-tax profits.

We have started our work towards this by strengthening the management team and launching the ‘HSBC Insurance’ brand, repositioning for growth and aiming to be a top-10 player. We are committed to the life, pensions and investments business and to working with preferred strategic partners in general insurance, and to raising the Group’s retention levels.

We announced three insurance deals in three months. In France, where we are building our life, pensions, investments and retirement services business, we acquired the remaining 50 per cent of Erisa, the life, property and casualty insurer, from our former joint venture partner, Swiss Life, for a consideration of €229 million. In the UK, HSBC Bank plans to partner with Aviva to create a joint venture under the ‘HSBC Insurance’ brand. In India, we plan to create a joint venture life insurance company – Canara HSBC Life Insurance – with Canara Bank and the Oriental Bank of Commerce. The new company will have access to the customers of both banks – 40 million people in total – and provides a platform for growth in India’s expanding life insurance market.

Global wealth creation supporting strong growth in private banking

Given the strong economic background and buoyant property and stock markets in many parts of the

world, increasing wealth accumulation drove strong growth in client assets and sales of structured investment products within our private banking operations. Client assets grew by 11 per cent to reach US$370 billion. Fee revenues within the private bank were up by 15 per cent to a record US$811 million. In part, this reflected improved cooperation between our commercial bank and the private bank in terms of customer referral, and the use of our in-house structuring capabilities in CIBM to build the products demanded by the private bank’s customers.

Global credit environment

Apart from US sub-prime mortgages, the credit environment generally remained favourable globally in the first half of the year, with continuing low levels of impairment emerging across our corporate and commercial lending books. Encouragingly, more recent underwriting of unsecured personal lending in the UK has performed better, although credit impairment has remained at the elevated levels experienced in the past two years.

High levels of liquidity and demand for higher yielding debt, combined with investor appetite for higher leverage, have historically supported the restructuring of corporate balance sheets. We remain alert, however, to the probability of a change in sentiment, in particular as risk premia are rising and interest rates move on an upward trend across much of the world.

A clear way forward

The management team has a clear strategy to execute and we have produced strong results for the half-year. We will build on these results during the rest of the year. We are focused on growing revenues by joining up the company for the benefit of our customers. We are intent on slowing cost growth by using technology to re-engineer our processes in a meaningful way. We believe there is great potential to unlock further value from HSBC and we aim to do precisely that.

Michael Geoghegan, Group Chief Executive
30 July 2007

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H S B C H O L D I N G S P L C

Business Review

	Page
Principal activities	11
Strategic direction	11
Customer groups and global businesses	12
Summary of customer groups and global businesses	12
Personal Financial Services	13
Commercial Banking	14
Corporate, Investment Banking and Markets	15
Private Banking	17
Other	18
Analysis by customer group and global business	19
Geographical regions	22
Summary of geographical regions	22
Europe	23
Hong Kong	34
Rest of Asia-Pacific	41
North America	52
Latin America	63

Principal activities

HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$215 billion at 30 June 2007.

Through its subsidiaries and associates, HSBC provides a comprehensive range of banking and related financial services. Headquartered in London, HSBC operates through long-established businesses and has an international network of over 10,000 properties in 83 countries and territories in five geographical regions: Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa; North America; and Latin America. Within these regions, a comprehensive range of financial services is offered to personal, commercial, corporate, institutional, investment and private banking clients. Services are delivered primarily by domestic banks, typically with large retail deposit bases, and consumer finance operations.

Strategic direction

HSBC’s strategic direction is to be the world’s leading financial services company, with ‘leading’ meaning the HSBC brand is preferred to others and HSBC’s corporate character is admired, its earnings per share growth is dynamic and it holds leadership positions in selected markets. Financial success is measured in terms of earnings growth and by comparing the Group’s total shareholder return (‘TSR’) target against a weighted TSR benchmark composed of a peer group of banks.

To achieve its strategy, the Group has identified seven priorities or ‘global pillars’ that will guide the Group’s strategic initiatives in 2007 and 2008. Success in achieving the priorities will be assessed by reviewing a suite of key performance indicators. The global pillars are:

•	to exploit HSBC’s global reach by more effectively joining up the company by country, distribution channel, customer group and global business;

•	to improve its customer experience so that customers feel that HSBC is the best place to bank;

•	to invest in developing HSBC’s brand and to encourage all staff to live HSBC’s brand values in their day-to-day activities;

•	to improve staff engagement by ensuring employment policies are progressive, perceptive, responsive, respectful and fair;

•	to grow the business by focusing on deposit-taking and achieving the right balance between risk and reward;

•	to enhance working practices and use technology more effectively to make it easier for customers to do business with the Group; and

•	to clearly allocate responsibility for delivery of the above initiatives to country managers and heads of customer groups and global businesses, with Group Head Office and regional head offices providing guidance and, where appropriate, delegating authority.

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H S B C H O L D I N G S P L C

Business Review (continued)

Customer groups and global businesses

Summary

HSBC manages its business through two customer groups, Personal Financial Services and Commercial Banking, and two global businesses, Corporate, Investment Banking and Markets (‘CIBM’), and

Private Banking. Personal Financial Services incorporates the Group’s consumer finance businesses, reflecting their increasing integration within mainstream financial services around the world. The largest of these is HSBC Finance Corporation (‘HSBC Finance’), one of the leading consumer finance companies in the US.

Profit before tax

	Half-year to

	30 June 2007		30 June 2006			31 December 2006

	US$m	%		US$m	%		US$m		%

Personal Financial Services	4,729	33.4		5,908	47.2		3,549		37.1
Commercial Banking	3,422	24.2		2,862	22.9		3,135		32.8
Corporate, Investment Banking and Markets	4,158	29.4		3,144	25.1		2,662		27.8
Private Banking	780	5.5		600	4.8		614		6.4
Other	1,070	7.5		3	–		(391	)	(4.1	)

	14,159	100.0		12,517	100.0		9,569		100.0


Total assets¹

	At 30 June 2007		At 30 June 2006		At 31 December 2006

	US$m	%	US$m	%	US$m	%

Personal Financial Services	577,402	26.9	511,552	29.4	546,568	29.4
Commercial Banking	225,763	10.5	186,195	10.7	213,450	11.5
Corporate, Investment Banking and Markets	1,220,316	56.7	940,177	54.1	994,436	53.4
Private Banking	81,916	3.8	67,643	3.9	73,026	3.9
Other	45,044	2.1	32,571	1.9	33,278	1.8

	2,150,441	100.0	1,738,138	100.0	1,860,758	100.0

For footnotes, see page 22.

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Personal Financial Services

Profit before tax

	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Net interest income	13,998		12,736		13,340
Net fee income	5,523		4,285		4,477
Trading income excluding net interest income	1		314		77
Net interest income on trading activities	92		103		117
Net trading income²	93		417		194
Net income from financial instruments designated at fair value	796		120		619
Gains less losses from financial investments	60		66		12
Dividend income	41		8		23
Net earned insurance premiums	3,735		2,517		2,613
Other operating income	255		343		439

Total operating income	24,501		20,492		21,717
Net insurance claims³	(3,605	)	(1,975	)	(2,390	)

Net operating income⁴	20,896		18,517		19,327
Loan impairment charges and other credit risk provisions	(5,928	)	(3,709	)	(6,240	)

Net operating income	14,968		14,808		13,087
Total operating expenses	(10,452	)	(9,073	)	(9,745	)

Operating profit	4,516		5,735		3,342

Share of profit in associates and joint ventures	213		173		207

Profit before tax	4,729		5,908		3,549

By geographical region
Europe	604		912		997
Hong Kong	1,898		1,420		1,460
Rest of Asia-Pacific	351		205		272
North America⁵	1,488		3,017		374
Latin America⁵	388		354		446

Profit before tax	4,729		5,908		3,549

	%		%		%
Share of HSBC’s profit before tax	33.4		47.2		37.1
Cost efficiency ratio	50.0		49.0		50.4

Balance sheet data¹
	US$m		US$m		US$m
Loans and advances to customers (net)	460,196		424,796		448,545
Total assets	577,402		511,552		546,568
Customer accounts	416,525		355,627		388,468

For footnotes, see page 22.

Business highlights

•	Pre-tax profits from Personal Financial Services were US$4,729 million, a decrease of 20 per cent compared with the first half of 2006. This was primarily caused by higher loan impairment charges in the US. Outside the US, pre-tax profits grew strongly in Hong Kong, Brazil, the United Arab Emirates and across the rest of Asia-Pacific. On an underlying basis, profit before tax was 22 per cent lower.

•	HSBC Premier, the Group’s personal banking service targeted at mass-affluent customers, was relaunched simultaneously in 35 markets in May 2007. With a new logo and bespoke look and feel, HSBC Premier offers a comprehensive and consistent proposition to affluent customers across many markets, supported by 250 International Premier Centres worldwide. By the end of June 2007, some 75,000 new customers had signed up to the service.

•	HSBC Direct, the Group’s online banking and savings proposition, was launched in South Korea and Canada during the first half of 2007, following Taiwan in September 2006 and the US a year earlier.

•	In Asia, over 120,000 customers are now using HSBC Direct with savings balances exceeding US$900 million. The HSBC Direct business in the US attracted 225,000 new customers and US$4.8 billion of balances in the first half of 2007. HSBC intends to introduce HSBC Direct in other markets in 2008.

•	The Group’s new strategic Internet Banking platform, developed to meet customer needs across all Personal Financial Services markets, was rolled out in Hong Kong, bringing the number of markets in which it is deployed to 21. The platform will continue to be rolled out to new markets over the next 18 months.

•	In the UK, 12 per cent of personal loan applications are now being completed online using a new automated personal loan system which enables approved loans to be paid into customers’ accounts within minutes of their application.

•	In Hong Kong, over four million stock trades were completed in the first half of 2007, 83 per cent of which were online. Online trades were up 98 per cent on the second half of 2006.

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H S B C H O L D I N G S P L C

Business Review (continued)

Commercial Banking

Profit before tax

	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Net interest income	4,286		3,515		3,999
Net fee income	1,904		1,555		1,652
Trading income excluding net interest income	121		91		113
Net interest income on trading activities	13		5		15
Net trading income²	134		96		128
Net income/(expense) from financial instruments designated at fair value	(24	)	(40	)	18
Gains less losses from financial investments	25		23		21
Dividend income	4		2		4
Net earned insurance premiums	205		128		130
Other operating income	2		126		124

Total operating income	6,536		5,405		6,076
Net insurance claims³	44		(42	)	(54	)

Net operating income⁴	6,580		5,363		6,022
Loan impairment charges and other credit risk provisions	(431	)	(260	)	(437	)

Net operating income	6,149		5,103		5,585
Total operating expenses	(2,907	)	(2,385	)	(2,594	)

Operating profit	3,242		2,718		2,991
Share of profit in associates and joint ventures	180		144		144

Profit before tax	3,422		2,862		3,135

By geographical region
Europe	1,236		1,076		1,158
Hong Kong	760		587		734
Rest of Asia-Pacific	597		498		536
North America⁵	477		464		493
Latin America⁵	352		237		214

Profit before tax	3,422		2,862		3,135

	%		%		%
Share of HSBC’s profit before tax	24.2		22.9		32.8
Cost efficiency ratio	44.2		44.5		43.1

Balance sheet data¹
	US$m		US$m		US$m
Loans and advances to customers (net)	185,923		152,318		172,976
Total assets	225,763		186,195		213,450
Customer accounts	205,002		165,706		190,853

For footnotes, see page 22.

Business highlights

•	Pre-tax profit increased by 20 per cent to US$3,422 million, representing 24 per cent of Group profits. Revenue growth of 23 per cent resulted from improved income from loans and advances, fees and customer deposits. Cost growth reflected business expansion in India, mainland China and the Middle East. These figures also reflected the inclusion for the first time of Grupo Banistmo S.A.’s (‘Grupo Banistmo’) operations in Latin America. The cost efficiency ratio improved from 44.5 per cent to 44.2 per cent. On an underlying basis, pre-tax profits were 14 per cent higher than in the first half of 2006.

•	Total customer numbers rose by 3 per cent to 2.7 million, with the strongest growth in Latin America.

•	Small business banking income growth was greatest in emerging markets, with Turkey benefiting from dedicated centres opened in 2006 and Mexico from product development. In addition, strong growth in Hong Kong resulted from promotions and a buoyant market. The Hong Kong Chamber for Small and Medium Business again recognised HSBC with its Best Partner Award. In the US, HSBC’s ‘Green Campaign’ targeted new customers with a package of incentives for customers switching to online bill payments.

•	HSBC continued to develop direct channels. The number of customers actively using HSBC’s internet banking services increased by 11 per cent. In Asia, internet banking migrated to a new platform with enhanced sales capabilities. In the UK, the Business Direct proposition, launched in September 2006, attracted 22,000 new customers in the first half of 2007. Globally, the number of Commercial Banking customers using HSBCnet also grew rapidly.

•	In international business, HSBC added seven new International Banking Centres dedicated to cross-border account opening, a network that now covers 23 countries. The Global Links cross-border referral system generated 37 per cent more referrals. To support customers with cross-border operations, credit processes were further streamlined. HSBC’s trade credentials were reinforced, winning ‘Best Online Trade Finance Provider’ for the first time, and ‘Best Factor’ for the fifth successive year, in the Euromoney Trade Finance Awards for Excellence.

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Corporate, Investment Banking and Markets

Profit before tax

	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Net interest income	1,847		1,394		1,774
Net fee income	2,264		1,810		1,908
Trading income excluding net interest income	3,048		2,613		2,277
Net interest expense on trading activities	(151	)	(117	)	(262	)
Net trading income²	2,897		2,496		2,015
Net income/(expense) from financial instruments designated at fair value	11		47		(27	)
Gains less losses from financial investments	768		269		265
Dividend income	175		147		88
Net earned insurance premiums	46		41		32
Other operating income	529		578		800

Total operating income	8,537		6,782		6,855
Net insurance claims³	(38	)	(31	)	(31	)

Net operating income⁴	8,499		6,751		6,824
Net loan impairment recoveries and other credit risk provisions	24		109		10

Net operating income	8,523		6,860		6,834
Total operating expenses	(4,479	)	(3,740	)	(4,251	)

Operating profit	4,044		3,120		2,583
Share of profit in associates and joint ventures	114		24		79

Profit before tax	4,158		3,144		2,662


By geographical region
Europe	1,674		1,202		1,102
Hong Kong	697		477		478
Rest of Asia-Pacific	1,098		839		810
North America⁵	436		349		74
Latin America⁵	253		277		198

Profit before tax	4,158		3,144		2,662


	%		%		%
Share of HSBC’s profit before tax	29.4		25.1		27.8
Cost efficiency ratio	52.7		55.4		62.3

For footnotes, see page 22.

Business highlights

•	Pre-tax profit increased by 32 per cent to US$4,158 million, driven by a 26 per cent rise in total operating income. Strong performance across major product lines was due to past investment in building the systems and sales infrastructure to support the continued successful delivery of HSBC’s emerging markets-led and financing-focused wholesale banking strategy. Asia and Latin America accounted for 49 per cent of profit before tax. The cost efficiency ratio improved by 2.7 percentage points, reflecting a significant acceleration of revenue growth ahead of cost growth. The increase in operating expenses was partly driven by performance- related compensation, which rose in line with the robust revenue growth. Higher operational costs also reflected volume increases, particularly in securities services and payments and cash management. On an underlying basis, pre-tax profits were 27 per cent higher than in the first half of 2006.

•	HSBC’s extensive geographical network and its recently enhanced product capabilities enabled the tailored delivery of risk management, investment, financing and other solutions to clients around the world. HSBC was named global ‘Best Risk Management House’ and ‘Best Cash Management House’ in the Euromoney 2007 Awards for Excellence. In regional Euromoney awards, HSBC was also named ‘Best Risk Management House’ in the Middle East, ‘Best FX House’ in Asia and, for the 10th consecutive year, ‘Best Risk Management House’ in Asia.

•	In Global Markets, total operating income increased by 26 per cent. The structured derivatives business gained momentum as investment in technical expertise and systems enabled HSBC to address a broader spectrum of client needs.

	Foreign exchange reported gains from growth in the core business and increased customer activity, against the backdrop of a weakening US dollar. Strong gains were reported across emerging markets as HSBC continued to harness the Group’s global distribution network.

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H S B C H O L D I N G S P L C

Business Review (continued)

Management view of total operating income

	Half-year to

	30 June	30 June	31 December
	2007	2006¹	2006¹
	US$m	US$m	US$m

Global Markets	3,590	2,849	2,684
Foreign exchange	909	848	704
Credit and rates	653	694	640
Structured derivatives	765	455	419
Equities²	408	196	201
HSBC Securities Services	855	656	720
Global Banking	2,209	1,996	2,100
Investment banking	592	491	674
Lending	685	713	560
Payments and cash management	751	609	648
Other transaction services	181	183	218
Balance Sheet Management	521	366	347
Group Investment Businesses	636	595	471
Principal Investments	755	292	394
Other³	826	684	859

Total operating income	8,537	6,782	6,855


Balance sheet data⁴
Loans and advances to:
– customers (net)	241,602	203,159	210,220
– banks (net)	183,708	136,912	156,548
Total assets	1,220,316	940,177	994,436
Customer accounts	265,739	235,329	235,965
Trading assets, financial instruments designated at fair value, and financial investments	601,883	448,595	487,943
Deposits by banks	121,744	77,584	92,954

1	The comparatives have been restated to reflect the current management view. The results of HSBC Trinkaus & Burkhardt AG, previously reported in ‘Other’, are now included in the appropriate business lines above. ‘Principal Investments’ includes private equity, and HSBC Specialist Investment Ltd previously reported in Group Investment Businesses.
2	‘Equities’ includes a total gain of US$107 million from the disposal of HSBC’s investments in Euronext N.V. and the Montreal Exchange.
3	‘Other’ includes net interest earned on free capital held in CIBM not assigned to products.
4	Third party only.


	Equities recorded a significant increase on the comparable period in 2006, partly driven by the strength of major stock indices. Revenue from the credit and rates business declined due to widening credit spreads. Securities services benefited from increased customer volumes in higher-value products and strong income growth in emerging markets. Assets under custody rose by 32 per cent.

•	In Global Banking, total operating income rose by US$213 million. Income from financing transactions rose partly due to higher fee income in leveraged and acquisition finance, principally in the UK. Payments and cash management delivered a strong performance across most regions, driven by growth in client deposits.

	HSBC’s strong focus on emerging markets and financing was highlighted by several notable transactions, including cross-border investment banking mandates for Singapore Telecommunications’ US$758 million acquisition of a 30 per cent stake in Warid Telecom of Pakistan; National Titanium Dioxide of Saudi Arabia’s S$1.2 billion acquisition of Lyondell Chemical’s inorganic chemicals business in the US; and Dubai Drydocks’ S$650 million acquisition of Pan-United Marine of Singapore.

	HSBC acted as lead arranger of US$9.2 billion of facilities for the acquisition of GE Plastics by Saudi Basic Industries; €2.25 billion of facilities backing the acquisition of Mölnlycke Health Care of Sweden by Investor AB; and facilities for Macquarie of £1.8 billion for the acquisition of O2 Airwave and £3.4 billion for the acquisition of National Grid Wireless.

	In debt capital markets, HSBC ranked first in the Asian local currency bond league table compiled by Bloomberg, first in the sterling bond league table and sixth in the international bond league table. HSBC ranked sixth in the Asia (ex Japan) league table for equity initial public offerings (‘IPOs’).

•	In Balance Sheet Management, total operating income increased by 42 per cent. This was driven by a recovery in revenues in Asia.

•	Gains from realisations increased in Principal Investments as a result of an increase in the number of disposals and higher exit multiples. The structure of Principal Investments was realigned to position the business for further development.

•	Group Investment Businesses’ operating income rose by 7 per cent due to continued strong contribution from performance fees coupled with a modest growth in funds under management, mainly relating to emerging market funds. Noteworthy successes included the development of Latin American equity fund sales in Europe and Asia-Pacific, multi-manager business globally and landmark pension fund mandates won in Europe and North America.

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Private Banking

Profit before tax

	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Net interest income	567		482		529
Net fee income	811		705		618
Trading income excluding net interest income	255		209		153
Net interest income/ (expense) on trading activities	4		7		(5	)
Net trading income²	259		216		148
Net income from financial instruments designated at fair value	–		–		1
Gains less losses from financial investments	45		28		138
Dividend income	5		4		1
Other operating income	31		25		36

Total operating income	1,718		1,460		1,471
Net insurance claims³	–		–		–

Net operating income⁴	1,718		1,460		1,471
Loan impairment charges and other credit risk provisions	(9	)	(29	)	(4	)

Net operating income	1,709		1,431		1,467
Total operating expenses	(929	)	(831	)	(854	)

Operating profit	780		600		613
Share of profit in associates and joint ventures	–		–		1

Profit before tax	780		600		614

By geographical region
Europe	493		388		417
Hong Kong	161		123		78
Rest of Asia-Pacific	56		48		32
North America⁵	60		38		76
Latin America⁵	10		3		11

Profit before tax	780		600		614


	%		%		%
Share of HSBC ’s profit before tax	5.5		4.8		6.4
Cost efficiency ratio	54.1		56.9		58.1

Balance sheet data¹
	US$m		US$m		US$m
Loans and advances to customers (net)	37,863		31,903		34,297
Total assets	81,916		67,643		73,026
Customer accounts	91,228		76,496		80,303

For footnotes, see page 22.

Business highlights

•	Pre-tax profits grew by 30 per cent to US$780 million, as HSBC’s competitive offerings proved attractive to clients in an economic environment that continued to be conducive to wealth management services. On an underlying basis, profit before tax was 27 per cent higher than in the first half of 2006.

•	Private Banking demonstrated success in implementing HSBC’s strategy of joining up the Group and harnessing the strengths of its main businesses. Cross-referrals with other customer groups were positive, with almost US$2 billion in ‘total client assets’ referred into Private Banking, and anticipated fees for the Group from mandated deals referred by Private Banking to CIBM in the first six months of 2007 reaching US$75 million.

•	Client assets, which provide an indicator of overall Private Banking volumes and include funds under management, cash deposits and certain on-balance sheet trust assets, rose by 11 per cent, or 10 per cent on an underlying basis, compared with 31 December 2006, to reach US$370 billion.


	Half-year to

	30 June	30 June	31 December
	2007	2006	2006
	US$bn	US$bn	US$bn

At beginning of period	333	273	305
Net new money	17	19	15
Value change	12	5	16
Exchange/other	8	8	(3	)

At end of period	370	305	333

•	Many of HSBC’s competitors publish a measure of assets managed which also includes non- financial assets held off-balance sheet in client trusts. HSBC refers to this measure as total client assets and, at 30 June 2007, this amounted to US$442 billion, an 8 per cent increase since 31 December 2006.

•	Amanah Investment Solutions, a shariah (Islamic law)-compliant multi-manager fund product, was added to the successful Investment Solutions offerings.

•	Private Banking clients took up approximately one-third of the US$1.1 billion launch of HSBC’s MultiAlpha China Fund.

•	The HSBC Special Opportunities Fund, a fund of hedge funds that invests in long-term alternative strategies, raised over US$465 million.

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H S B C H O L D I N G S P L C

Business Review (continued)

Other

Profit/(loss) before tax

	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Net interest expense	(291	)	(292	)	(333	)
Net fee income/(expense)	(7	)	25		147
Trading expense excluding net interest income	(74	)	(115	)	(113	)
Net interest income on trading activities	25		47		35
Net trading expense²	(49	)	(68	)	(78	)
Net income/(expense) from financial instruments designated at fair value	91		133		(214	)
Gains less losses from financial investments	101		107		40
Gains arising from dilution of interests in associates	1,076		–		–
Dividend income	27		61		2
Net earned insurance premiums	(9	)	148		59
Other operating income	1,667		1,544		1,710

Total operating income	2,606		1,658		1,333
Net insurance claims³	–		(101	)	(80	)

Net operating income⁴	2,606		1,557		1,253
Loan impairment charges and other credit risk provisions	(2	)	(1	)	(12	)

Net operating income	2,604		1,556		1,241
Total operating expenses	(1,650	)	(1,573	)	(1,686	)

Operating profit/(loss)	954		(17	)	(445	)
Share of profit in associates and joint ventures	116		20		54

Profit/(loss) before tax	1,070		3		(391	)

By geographical region
Europe	43		22		(300	)
Hong Kong	(186	)	47		(222	)
Rest of Asia-Pacific	1,242		67		220
North America⁵	(26	)	(127	)	(90	)
Latin America⁵	(3	)	(6	)	1

Profit/(loss) before tax	1,070		3		(391	)


	%		%		%
Share of HSBC’s profit before tax	7.5		–		(4.1	)
Cost efficiency ratio	63.3		101.0		134.6

Balance sheet data¹
	US$m		US$m		US$m
Loans and advances to customers (net)	2,517		2,033		2,095
Total assets	45,044		32,571		33,278
Customer accounts	2,338		584		1,245

For footnotes, see page 22.

Notes

•	For a description of the main items reported under ‘Other’, see footnote 6 on page 22.

•	HSBC recorded dilution gains of US$1,076 million following share offerings made in Shanghai by HSBC’s three associates: Ping An Insurance (Group) Company of China, Limited (‘Ping An Insurance’), Bank of Communications Limited (‘Bank of Communications’) and Industrial Bank Co. Limited (‘Industrial Bank’), which all successfully raised new capital. The consequent dilution of HSBC’s interests was considerably less than its share of the new monies raised, resulting in the gains recognised. For further details see Note 19 on the Financial Statements.

•	The results of the HSBC Insurance Brokers group were allocated to HSBC’s customer groups in the first half of 2007, having been reported within Other in 2006. As a consequence, net operating income before loan impairment charges and operating expenses were US$205 million and US$178 million, respectively, lower than in the first half of 2006, resulting in a US$27 million reduction in profit before tax.

•	This segment includes fair value movements of US$284 million on HSBC’s own debt in issue and related swaps. This movement is largely a consequence of higher medium to longer-term interest rates in the UK and a widening of credit spreads in North America.

•	The Group Service Centres continued to grow in the first half of 2007, their nearly 29,000 employees providing services to 40 different HSBC companies, handling on average 462,000 calls and processing 1.7 million transactions every day. The Group Service Centres provide a range of services from general processing work, telephone banking services and value-added services for analytical and financial modelling for certain lines of business. Costs rose by 32 per cent, substantially all of which were recharged to HSBC’s customer groups and global businesses. During the first half of 2007, three additional Group Service Centres became operational, with a further two under development.

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Analysis by customer group and global business

Profit/(loss) before tax and balance sheet data

Half-year to 30 June 2007

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other⁶

elimination

Total

US$m

Net interest income/(expense)

13,998

4,286

1,847

567

(291

)

(2,177

)

18,230

Net fee income/(expense)

5,523

1,904

2,264

811

)

–

10,495

Trading income/(expense) excluding net interest income

121

3,048

255

(74

)

–

3,351

Net interest income/(expense) on trading activities

(151

)

2,177

2,160

Net trading income/(expense)²

134

2,897

259

(49

)

2,177

5,511

Net income/(expense) from financial instruments designated at fair value

796

(24

)

–

874

Gains less losses from financial investments

768

101

–

999

Gains arising from dilution of interests in associates

–

1,076

–

1,076

Dividend income

175

–

252

Net earned insurance premiums

3,735

205

–

)

–

3,977

Other operating income

255

529

1,667

(1,806

)

678

Total operating income

24,501

6,536

8,537

1,718

2,606

(1,806

)

42,092

Net insurance claims³

(3,605

)

(38

)

–

(3,599

)

Net operating income⁴

20,896

6,580

8,499

1,718

2,606

(1,806

)

38,493

Loan impairment (charges)/recoveries and other credit risk provisions

(5,928

)

(431

)

–

(6,346

)

Net operating income

14,968

6,149

8,523

1,709

2,604

(1,806

)

32,147

Total operating expenses

(10,452

)

(2,907

)

(4,479

)

(929

)

(1,650

)

1,806

(18,611

)

Operating profit

4,516

3,242

4,044

780

954

–

13,536

Share of profit in associates and joint ventures

213

180

114

–

116

–

623

Profit before tax

4,729

3,422

4,158

780

1,070

–

14,159

Share of HSBC’s profit before tax

33.4

24.2

29.4

5.5

7.5

100.0

Cost efficiency ratio

50.0

44.2

52.7

54.1

63.3

48.3

Balance sheet data¹

U$Sm

US$m

Loans and advances to customers (net)

460,196

185,923

241,602

37,863

2,517

928,101

Total assets

577,402

225,763

1,220,316

81,916

45,044

2,150,441

Customer accounts

416,525

205,002

265,739

91,228

2,338

980,832

Loans and advances to banks (net)⁷

183,708

Trading assets, financial assets designated at fair value, and financial investments⁷

601,883

Deposits by banks⁷

121,744

For footnotes, see page 22.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data (continued)
	Half-year to 30 June 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other⁶		elimination		Total
Total	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/(expense)	12,736		3,515		1,394		482		(292	)	(1,104	)	16,731
Net fee income	4,285		1,555		1,810		705		25		–		8,380
Trading income/(expense) excluding net interest income	314		91		2,613		209		(115	)	–		3,112
Net interest income/(expense) on trading activities	103		5		(117	)	7		47		1,104		1,149
Net trading income/(expense)²	417		96		2,496		216		(68	)	1,104		4,261
Net income/(expense) from financial instruments designated at fair value	120		(40	)	47		–		133		–		260
Gains less losses from financial investments	66		23		269		28		107		–		493
Dividend income	8		2		147		4		61		–		222
Net earned insurance premiums	2,517		128		41		–		148		–		2,834
Other operating income	343		126		578		25		1,544		(1,463	)	1,153

Total operating income	20,492		5,405		6,782		1,460		1,658		(1,463	)	34,334
Net insurance claims³	(1,975	)	(42	)	(31	)	–		(101	)	–		(2,149	)

Net operating income⁴	18,517		5,363		6,751		1,460		1,557		(1,463	)	32,185
Loan impairment (charges)/recoveries and other credit risk provisions	(3,709	)	(260	)	109		(29	)	(1	)	–		(3,890	)

Net operating income	14,808		5,103		6,860		1,431		1,556		(1,463	)	28,295
Total operating expenses	(9,073	)	(2,385	)	(3,740	)	(831	)	(1,573	)	1,463		(16,139	)

Operating profit/(loss)	5,735		2,718		3,120		600		(17	)	–		12,156
Share of profit in associates and joint ventures	173		144		24		–		20		–		361

Profit before tax	5,908		2,862		3,144		600		3		–		12,517


	%		%		%		%		%				%
Share of HSBC’s profit before tax	47.2		22.9		25.1		4.8		–				100.0
Cost efficiency ratio	49.0		44.5		55.4		56.9		101.0				50.1

Balance sheet data¹
	U$Sm		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	424,796		152,318		203,159		31,903		2,033				814,209
Total assets	511,552		186,195		940,177		67,643		32,571				1,738,138
Customer accounts	355,627		165,706		235,329		76,496		584				833,742
Loans and advances to banks (net)⁷					136,912
Trading assets, financial assets designated at fair value, and financial investments⁷					448,595
Deposits by banks⁷					77,584

For footnotes, see page 22.

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	Half-year to 31 December 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other⁶		elimination		Total
Total	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/ (expense)	13,340		3,999		1,774		529		(333	)	(1,554	)	17,755
Net fee income	4,477		1,652		1,908		618		147		–		8,802
Trading income/(expense) excluding net interest income	77		113		2,277		153		(113	)	–		2,507
Net interest income/(expense) on trading activities	117		15		(262	)	(5	)	35		1,554		1,454
Net trading income/(expense)²	194		128		2,015		148		(78	)	1,554		3,961
Net income/(expense) from financial instruments designated at fair value	619		18		(27	)	1		(214	)	–		397
Gains less losses from financial investments	12		21		265		138		40		–		476
Dividend income	23		4		88		1		2		–		118
Net earned insurance premiums	2,613		130		32		–		59		–		2,834
Other operating income	439		124		800		36		1,710		(1,716	)	1,393

Total operating income	21,717		6,076		6,855		1,471		1,333		(1,716	)	35,736
Net insurance claims³	(2,390	)	(54	)	(31	)	–		(80	)	–		(2,555	)

Net operating income⁴	19,327		6,022		6,824		1,471		1,253		(1,716	)	33,181
Loan impairment (charges)/ recoveries and other credit risk provisions	(6,240	)	(437	)	10		(4	)	(12	)	–		(6,683	)

Net operating income	13,087		5,585		6,834		1,467		1,241		(1,716	)	26,498
Total operating expenses	(9,745	)	(2,594	)	(4,251	)	(854	)	(1,686	)	1,716		(17,414	)

Operating profit/(loss)	3,342		2,991		2,583		613		(445	)	–		9,084
Share of profit in associates and joint ventures	207		144		79		1		54		–		485

Profit/(loss) before tax	3,549		3,135		2,662		614		(391	)	–		9,569


	%		%		%		%		%				%
Share of HSBC’s profit before tax	37.1		32.8		27.8		6.4		(4.1	)			100.0
Cost efficiency ratio	50.4		43.1		62.3		58.1		134.6				52.5

Balance sheet data¹
	U$Sm		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	448,545		172,976		210,220		34,297		2,095				868,133
Total assets	546,568		213,450		994,436		73,026		33,278				1,860,758
Customer accounts	388,468		190,853		235,965		80,303		1,245				896,834
Loans and advances to banks (net)⁷					156,548
Trading assets, financial assets designated at fair value, and financial investments⁷					487,943
Deposits by banks⁷					92,954

For footnotes, see page 22.

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H S B C H O L D I N G S P L C

Business Review (continued)

Basis of preparation

Customer group results are presented in accordance with the accounting policies used in the preparation of HSBC’s consolidated financial statements. HSBC’s operations are closely integrated and, accordingly, the presentation of customer group data includes internal allocations of certain items of income and expense. These allocations include the costs of certain support services and head office functions, to the extent that these can be

meaningfully attributed to operational business lines. While such allocations have been made on a systematic and consistent basis, they necessarily involve a degree of subjectivity.

Where relevant, income and expense amounts presented include the results of inter-segment funding as well as inter-company and inter-business line transactions. All such transactions are undertaken on arm’s length terms.

Footnotes to ‘Customer groups and global businesses’ on pages 12 to 21.

1	Third party only.
2	In the customer group analyses, net trading income comprises all gains and losses from changes in the fair value of financial assets and financial liabilities classified as held for trading, together with related external and internal interest income and interest expense, and dividends received; in the statutory presentation internal interest income and expense are eliminated.
3	Net insurance claims incurred and movement in policyholders’ liabilities.
4	Net operating income before loan impairment charges and other credit risk provisions.
5	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.
6	The main items reported under Other are certain property activities, unallocated investment activities including hsbc.com, centrally held investment companies, movements in the fair value of own debt designated at fair value, and HSBC’s holding company and financing operations. The results include net interest earned on free capital held centrally and operating costs incurred by the head office operations in providing stewardship and central management services to HSBC. Other also includes the costs incurred by the Group Service Centres and Shared Service Organisations and associated recoveries.
7	Assets and liabilities which were significant to Corporate, Investment Banking and Markets.

Geographical regions

In the analysis of profit by geographical region that follows, operating income and operating expenses include intra-HSBC items of US$852 million (first half of 2006: US$617 million; second half of 2006: US$877 million).

Profit before tax

	Half-year to

	30 June 2007		30 June 2006		31 December 2006
	US$m	%	US$m	%	US$m	%

Europe	4,050	28.6	3,600	28.8	3,374	35.3
Hong Kong	3,330	23.5	2,654	21.2	2,528	26.4
Rest of Asia-Pacific	3,344	23.6	1,657	13.2	1,870	19.5
North America¹	2,435	17.2	3,741	29.9	927	9.7
Latin America¹	1,000	7.1	865	6.9	870	9.1

	14,159	100.0	12,517	100.0	9,569	100.0

Total assets²
	At 30 June 2007		At 30 June 2006		At 31 December 2006

	US$m	%	US$m	%	US$m	%

Europe	1,040,019	48.3	767,608	44.2	828,701	44.6
Hong Kong	300,681	14.0	246,781	14.2	272,428	14.6
Rest of Asia-Pacific	201,123	9.4	168,857	9.7	167,668	9.0
North America¹	519,693	24.2	495,895	28.5	511,190	27.5
Latin America¹	88,925	4.1	58,997	3.4	80,771	4.3

	2,150,441	100.0	1,738,138	100.0	1,860,758	100.0

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.
2	Third party only.

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Europe

Profit/(loss) before tax by country within customer groups and global businesses

			Corporate,
	Personal		Investment
	Financial	Commercial	Banking &	Private
	Services	Banking	Markets¹	Banking		Other		Total
	US$m	US$m	US$m	US$m		US$m		US$m

Half-year to 30 June 2007
United Kingdom	384	1,001	902	198		(79	)	2,406
France²	97	119	461	9		26		712
Germany	–	19	125	25		–		169
Malta	26	35	18	–		–		79
Switzerland	–	–	–	260		–		260
Turkey	71	34	56	–		–		161
Other	26	28	112	1		96		263

	604	1,236	1,674	493		43		4,050

Half-year to 30 June 2006
United Kingdom	629	851	662	106		99		2,347
France²	132	101	306	16		(62	)	493
Germany	–	20	54	27		2		103
Malta	19	23	16	–		–		58
Switzerland	–	–	–	169		–		169
Turkey	71	27	22	–		–		120
Other	61	54	142	70		(17	)	310

	912	1,076	1,202	388		22		3,600

Half-year to 31 December 2006
United Kingdom	867	950	637	274		(284	)	2,444
France²	42	135	239	6		(45	)	377
Germany	–	9	60	14		14		97
Malta	23	27	13	–		–		63
Switzerland	–	–	–	136		–		136
Turkey	50	23	42	–		(18	)	97
Other	15	14	111	(13	)	33		160

	997	1,158	1,102	417		(300	)	3,374

Loans and advances to customers (net) by country

	Half-year to

	30 June	30 June	31 December
	2007	2006	2006
	US$m	US$m	US$m

United Kingdom	325,199	277,077	305,758
France²	67,670	54,023	55,491
Germany	5,763	4,459	4,439
Malta	3,700	3,203	3,456
Switzerland	11,164	8,363	9,151
Turkey	6,148	4,445	5,233
Other	8,464	7,829	8,971

	428,108	359,399	392,499

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H S B C H O L D I N G S P L C

Business Review (continued)

Customer accounts by country

	Half-year to

	30 June	30 June	31 December
	2007	2006	2006
	US$m	US$m	US$m

United Kingdom	346,547	290,050	318,614
France²	48,961	47,024	43,372
Germany	9,671	10,915	11,607
Malta	4,779	4,192	4,529
Switzerland	35,266	29,993	30,062
Turkey	5,074	4,291	4,140
Other	8,210	6,268	7,041

	458,508	392,733	419,365

1	Including venture capital gains of US$548 million in the first half of 2007 (US$117 million in the first half of 2006: US$340 million in the second half of 2006).
2	France primarily comprises the domestic operations of HSBC France and the Paris branch of HSBC Bank plc.

Economic briefing

The UK economy remained robust throughout the first half of 2007. The growth in gross domestic product (‘GDP’) in the first half of the year was 3 per cent year-on-year, broadly in line with its average during the past decade. Consumer spending was relatively strong in the first quarter but slowed in the second as retail spending weakened in response to increases in interest rates. The Bank of England raised the bank rate by 25 basis points in each of January, May and July 2007 to 5.75 per cent. These interest rate rises appeared to restrain housing market activity and subdue house price inflation. However, inflation continued to cause concern as the Consumer Price Index (‘CPI’) reached 3.1 per cent, the highest level in ten years, and the Retail Price Index (‘RPI’), which includes the cost of housing and mortgage payments, reached 4.8 per cent in March. By June, CPI inflation had eased to 2.4 per cent and RPI inflation to 4.4 per cent. The unemployment rate has remained stable at 5.5 per cent since the middle of 2006.

Having expanded by 2.9 per cent in 2006, GDP in the eurozone continued to grow by 3.1 per cent year-on-year in the first quarter of 2007, driven primarily by exports and investment. Employment growth remained robust, allowing the unemployment rate to fall to just 7 per cent, down from 7.5 per cent at the end of 2006. Consumer spending growth remained relatively subdued, primarily due to a 3 percentage point increase in German VAT which took effect in January. French GDP growth remained below the eurozone average at 1.9 per cent in the first quarter of 2007. Eurozone consumer price inflation stayed below 2 per cent throughout the first half of the year as the European Central Bank responded to the robust growth by tightening monetary policy in March and June 2007, taking the repo rate to 4 per cent.

Domestic demand continued to slow in Turkey as growth in private consumption, which accounts for nearly two-thirds of the economy, fell to just 1.6 per cent year-on-year in the first quarter of 2007 from 8.1 per cent in 2006. Investment demand growth also plunged to 3 per cent from above 30 per cent in the first quarter of 2006. Despite this, neither inflation nor the current account deficit improved as much as expected. Annual inflation was 8.6 per cent in June (compared with an official target of 4 per cent), partly because of higher food and energy prices. The unemployment rate was also unchanged at 9.8 per cent in April compared with 9.9 per cent a year ago, largely reflecting productivity growth and a shift from agricultural to service sector employment. Although the large interest rate differential kept the Turkish lira strong, monetary policy remained tight and cautious, with policy rates kept at 17.5 per cent since June 2006 due to high inflation.

Review of business performance

European operations reported a pre-tax profit of US$4,050 million compared with US$3,600 million in the first half of 2006, an increase of 13 per cent. On an underlying basis, pre-tax profits improved by 3 per cent. The difference was partly attributable to HSBC’s acquisition of its partner’s shares in life insurer, Erisa S.A., and property and casualty insurer, Erisa I.A.R.D., (together ‘Erisa’) in France in March 2007. Underlying revenue growth of 8 per cent was partly offset by higher loan impairment charges and a 10 per cent increase in operating expenses. CIBM delivered the strongest growth in pre-tax profits on the back of trading performance and significant private equity gains. Commercial Banking increased revenues from strong balance sheet growth, improved cross-sales in the UK and ongoing business expansion in Turkey. Private Banking

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Profit before tax
	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
Europe	US$m		US$m		US$m

Net interest income	3,920		4,094		4,195
Net fee income	4,144		3,513		3,595
Net trading income	3,338		2,187		2,342
Net income from financial instruments designated at fair value	348		129		15
Gains less losses from financial investments	790		266		358
Dividend income	161		121		62
Net earned insurance premiums	1,480		668		630
Other operating income	262		633		795

Total operating income	14,443		11,611		11,992
Net insurance claims incurred and movement in policyholders’ liabilities	(1,146	)	(287	)	(244	)

Net operating income before loan impairment charges and other credit risk provisions	13,297		11,324		11,748
Loan impairment charges and other credit risk provisions	(1,363	)	(935	)	(1,220	)

Net operating income	11,934		10,389		10,528
Total operating expenses	(7,972	)	(6,723	)	(7,148	)

Operating profit	3,962		3,666		3,380
Share of (loss)/profit in associates and joint ventures	88		(66	)	(6	)

Profit before tax	4,050		3,600		3,374


	%		%		%
Share of HSBC’s profit before tax	28.6		28.8		35.3
Cost efficiency ratio	60.0		59.4		60.8
Period-end staff numbers (full-time equivalent)	80,912		77,736		78,311

Balance sheet data¹
	US$m		US$m		US$m
Loans and advances to customers (net)	428,108		359,399		392,499
Loans and advances to banks (net)	79,817		64,564		76,830
Trading assets, financial instruments designated at fair value and financial investments	370,193		230,035		242,010
Total assets	1,040,019		767,608		828,701
Deposits by banks	86,912		55,783		67,821
Customer accounts	458,508		392,733		419,365


1	Third party only.

performance was notable, as strong demand for wealth management services and increased cross-referrals from HSBC businesses drove growth. In Personal Financial Services, profit before tax was lower than in the first half of 2006 as the benefit of growth in the customer base across the region was offset by a restricted appetite for credit, higher loan impairment charges, and the impact of overdraft fee refunds which increased in the wake of strong media campaigns.

The following commentary is on an underlying basis.

Personal Financial Services reported a pre-tax profit of US$604 million, a decrease of 42 per cent

compared with the first half of 2006. Notwithstanding the fact that income grew at a slower rate than costs, HSBC continued with major initiatives to enhance channel capacity and capabilities in the UK, in addition to pursuing business expansion-related investments across the rest of the region. In the UK, the benefits of targeted balance sheet growth, in particular from packaged accounts and savings products, were more than offset by higher loan impairment charges. In Turkey, pre-tax profits remained unchanged at US$71 million as the increased costs incurred to support future business growth offset income growth from strong customer acquisition and higher balances. In France, the positive effect on income of

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H S B C H O L D I N G S P L C

Business Review (continued)

customer acquisition and improved transactional commissions, driven by successful marketing campaigns, was offset by narrowing spreads, higher costs, and the non-recurrence of a large benefit in the first half of 2006 from the fair value effect of embedded options linked to government-regulated home savings products.

In the UK, HSBC continued to concentrate on acquiring and retaining customers through innovative services, improved e-sales offerings and a segmented approach to product development. The success of packaged current accounts, the introduction of initiatives to target the affluent, nearly-retired population, and the launch of the ‘MyMoney’ product, underlined the Group’s developing customer segmentation. Channel capacity and capabilities were enhanced through the ongoing retail refurbishment programme and the opening of more non-branch automated teller machines (‘ATMs’) and Express Banking kiosks across the country. HSBC Premier, designed to provide seamless cross-border banking, was relaunched in the UK and a further 34 countries.

In France, successful marketing campaigns continued to grow customer numbers. Average lending balances grew significantly, largely driven by mortgages originated in 2006. Sales of new mortgages eased in line with the slowing French housing market.

In Turkey, brand awareness and geographic coverage were enhanced by the opening of 25 branches during the first half of 2007, supported by a number of marketing initiatives. The focus on customer segmentation and cross-sales was aided by the introduction of new banking propositions for low and medium income groups.

Net interest income increased by 2 per cent to US$3,130 million, substantially in the UK, where HSBC continued to moderate lending growth in favour of competitive deposit products. Net interest income grew steadily, driven by growth in savings and current account balances and wider deposit spreads in the rising interest rate environment. This was partly offset by lower interest income from mortgages as margins narrowed, owing to a change in mix from variable to fixed rate products.

Average unsecured lending balances in the UK declined by 3 per cent as HSBC applied tighter underwriting criteria and emphasised non-lending related revenue streams, reflecting the Group’s reduced appetite for risk. Spreads improved slightly, despite the continuing shift in product mix towards higher value, lower yielding loans.

In a highly competitive environment, targeted marketing initiatives helped to boost UK savings account sales by 6 per cent. Average balances reached US$83 billion, an increase of 14 per cent from 30 June 2006 which, together with improved spreads, contributed to a 33 per cent increase in net interest income. HSBC had the highest market share of new savings account openings in the UK as at May 2007, driven by competitive internet-based products and rates.

Average current account balances in the UK increased by 4 per cent to US$28 billion. By creating value in its current accounts through the segmented approach to developing customer propositions referred to above, sales of HSBC’s premium service current accounts (‘Premier’ and ‘Plus’) increased substantially.

HSBC grew its UK credit card balances by 6 per cent despite the continuing slowdown in the market, although tightening spreads eroded the resulting benefits. Balance growth was strongest in Marks & Spencer (‘M&S’) branded cards. HSBC had 18 per cent of the market in terms of credit card sales turnover in the UK at May 2007, with online sales representing 27 per cent of total new account openings for HSBC and First Direct branded cards.

Average mortgage balances rose modestly as HSBC continued to restrict originations to its owned channels and the strongest growth in the market was seen through mortgage brokers. The portfolio mix shifted towards a higher proportion of fixed rate products as customers sought to fix their monthly payments and spreads tightened following the four base rate increases between August 2006 and 30 June 2007. The Group’s commitment to providing the best value to its customers was endorsed by What Mortgage awarding HSBC ‘Best Value National Bank’ for the sixth year running.

In France, net interest income fell by 10 per cent. Average lending balances grew by 20 per cent, mainly from mortgages originated in 2006, although the associated income benefits were offset by tightening spreads due to competitive pressure. Increased income from the investment of increased interest free deposit balances was negated by maturing higher yielding hedging products.

In Turkey, increased income from strong growth in customer accounts, lending and deposit balances was offset by lower income from credit cards as balance growth and margins were adversely affected by market-wide credit calming measures introduced in 2006. Net interest income stayed broadly in line with the first half of 2006. HSBC made good progress in its plan to add 400,000 new personal

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customers during 2007. Overall, average deposit balances grew by 27 per cent, largely driven by the strong customer recruitment. This was aided by the opening of 37 new branches since 30 June 2006 and ongoing efforts to build brand awareness. Deposit spreads were stable in an environment of rising interest rates. Average lending balances grew by 28 per cent, although the benefits from lending growth were more than offset by compressed margins due to the credit calming measures referred to above, as well as increased competition in the market.

Net fee income increased by 9 per cent, largely driven by higher sales of fee-earning packaged current accounts in the UK and credit cards in Turkey. This was partly offset by a US$23 million decrease in credit card default fees as HSBC reduced its credit card default fee to £12 following the outcome of an investigation by the UK Office of Fair Trading (‘OFT’) in April 2006. In France, improved transactional commissions, mainly from increased demand for packaged accounts and higher life insurance fees drove a 7 per cent increase in fee income.

Net trading income largely reflects the fair value measurement of embedded options linked to government regulated home savings products in France. In 2006, there was a large gain; this did not recur in the first half of 2007.

Gains on sale of financial investments declined due to the non-recurrence of the US$32 million share of profits from the MasterCard Incorporated IPO in the first half of 2006.

Other operating income declined significantly due to a reduction in the present value of in-force long-term insurance business, reflecting changes in Financial Services Authority (‘FSA’) rules. This was more than offset by a decrease in insurance claims. The non-recurrence of Personal Financial Services’ US$37 million share of the gain on the sale of HSBC’s stake in The Cyprus Popular Bank also contributed to the fall in other operating income, although this was largely offset by Personal Financial Services’ US$32 million share of a gain from the merger of two payment services providers.

Loan impairment charges and other credit risk provisions of US$1,127 million were 24 per cent higher than in the first half of 2006. In the UK, rising trends in personal bankruptcies and IVAs and growth in credit card lending contributed to the increase in charges, as did refinements to the methodology used to calculate roll rate percentages in the UK consumer finance business. Otherwise, overall credit quality was broadly stable. In France

and Turkey, loan impairment charges improved and credit quality also remained sound.

Operating expenses increased by 12 per cent. Within this, US$236 million reflected goodwill payments expensed in respect of overdraft fees applied in previous years. These payments were made on an ex gratia basis, without any admission of liability, taking into consideration the cost implications of legal action and the reluctance of HSBC Bank to engage in legal action against its customers.

The payments were made during a period in which the OFT and the British Bankers’ Association concluded a collaborative informal fact-finding exercise on the legal principles that apply to charges for unauthorised overdrafts, and the OFT announced on 29 March 2007 that it would undertake a formal investigation into the fairness of certain bank current account charges. This investigation remains ongoing and, against this background, came the further announcement on 26 July 2007 that the OFT would, by agreement, issue High Court legal proceedings on 27 July 2007 against a number of UK financial institutions, including HSBC Bank, to determine the legal status and enforceability of these charges.

The roll-out of the UK branch refurbishment programme to a further 26 branches, the opening of four ‘megastores’, and the recruitment of additional staff ahead of the introduction of extended opening hours in certain branches were the other significant reasons for the cost increase. In France, operating expenses rose as HSBC made further investments in pursuing its five-year expansion strategy. The 18 per cent increase in operating expenses in Turkey reflected ongoing investment in capacity and infrastructure to support business expansion.

Commercial Banking reported a pre-tax profit of US$1,236 million, an increase of 5 per cent. Revenues rose by 12 per cent as a result of balance sheet growth driven by customer recruitment and improved cross-sales in the UK, and the expansion of the small and mid-market segments in Turkey, Spain and Malta. Credit quality remained relatively good compared with historical experience but there were higher loan impairment charges on corporate relationship managed accounts in the UK and these, along with increased operating expenses from ongoing business expansion throughout the region, largely offset the revenue benefits from balance sheet growth.

HSBC began to expand the scope of its services in European emerging markets. In Poland, the Group extended its Commercial Banking presence to five cities and it recruited more relationship managers in

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H S B C H O L D I N G S P L C

Business Review (continued)

Slovakia and the Czech Republic. In May 2007, the Group secured a retail banking licence in Russia, where Commercial Banking services are focused on mid-market corporate clients with international trade requirements. HSBC also continued to develop its receivables finance offering with operations launched in Greece, Malta and Turkey in the first half of 2007.

In the UK, profit before tax increased by 7 per cent as HSBC placed considerable emphasis on increasing sales capacity through the recruitment of sales staff and investment in direct channels. The number of active customers on the Business Internet Banking platform increased by over 36 per cent with log-ons increasing by 20 per cent compared with the first half of 2006. ‘Business Direct’, HSBC’s commercial direct banking proposition, launched in September 2006, attracted over 22,000 new accounts, more than doubling account numbers on this channel, of which over 70 per cent were opened by new customers to HSBC. Physical infrastructure was enhanced to improve customer experience. The International Banking Centre, which was opened in 2006 to support the Group’s drive to lead the market in international commercial banking, continued to streamline cross-border account openings. Commercial Centres within the distribution network were refurbished, and ‘business zones’ focused on small business customers were installed within retail branches.

Net interest income increased by 10 per cent in the first half of 2007, largely from growth in the UK, Turkey, Germany and Malta. In the UK, a 9 per cent growth in deposit balances helped fund lending growth of 14 per cent. Libor-linked loan balances increased by over 50 per cent, with business loans and commercial mortgages up by 8 per cent and 24 per cent, respectively.

In France, higher net interest income derived from 18 per cent increases in both loan balances and deposit balances did not fully compensate for lower income from the placement of interest-free current account balances and tighter spreads on lending products. Customer recruitment remained buoyant as ongoing efforts to enhance brand awareness and improve segmentation among commercial business customers met with success.

Net interest income in Turkey increased by 47 per cent, as HSBC continued to develop its service offerings for its micro-, small- and medium-sized business customers. Lending growth of 32 per cent delivered a strong rise in income despite tighter spreads resulting from increased competition. Average deposit balances rose by 8 per cent, with

wider margins augmenting the benefits from balance growth.

Excluding Commercial Banking’s US$97 million share of Insurance Brokers’ fees previously included in the Other segment (see page 18), net fee income increased by 5 per cent. In the UK, a modest increase in net fee income was driven by strong performance in foreign exchange products, although growth was constrained by a structural shift from paper to electronic money transactions and reduced reliance on banks to facilitate overseas trade payments in an evolving trade finance environment. Bill and BACS payments made using internet banking increased by 33 per cent on the first half of 2006. In Turkey, net fee income grew by 78 per cent, driven by investment banking, advisory and structured finance transactions. In France, net fee income grew by 4 per cent as transaction fees increased.

Other operating income declined significantly, due to a reduction in the present value of in-force long-term insurance business, reflecting changes in FSA rules. This was more than offset by a decrease in insurance claims. The non-recurrence of Commercial Banking’s US$38 million share of the gain on the sale of HSBC’s stake in The Cyprus Popular Bank Limited (‘Cyprus Popular Bank’) also contributed to the fall in other operating income.

Loan impairment charges and other credit risk provisions remained low despite a 61 per cent rise compared with levels recorded in the first half of 2006. In the UK, loan impairment charges increased, reflecting provisions against bad debts due from two large corporate accounts and the ongoing impact of individual voluntary arrangements (‘IVAs’) on the micro business segment. In France, loan impairment charges were in line with the first half of 2006 while, in Turkey, increased charges reflected growth in lending volumes as general credit quality remained satisfactory.

Excluding Commercial Banking’s US$122 million share of Insurance Brokers’ expenses referred to above, operating expenses increased by 2 per cent, less than revenue growth of 7 per cent. Across Europe, growth in operating expenses primarily resulted from the recruitment of additional sales staff and other costs incurred in support of the growing business. Additionally, in France, there were incremental expenses associated with the merger of four regional banking subsidiaries.

Corporate, Investment Banking and Markets in Europe reported a pre-tax profit of US$1,674 million, which represented 40 per cent of the global

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business’s pre-tax profits, and a rise of 27 per cent compared with the first half of 2006. Increased trading revenues, significant gains from the private equity business and higher Global Banking fees resulted in an improvement in the cost efficiency ratio of 1.7 percentage points.

Total operating income increased by 19 per cent to US$4,170 million. In the UK, balance sheet management revenues decreased by 63 per cent as higher short-term interest rates resulted in a reduction in margins. Net interest income from corporate lending declined due to lower credit spreads in a competitive market.

Payments and cash management revenues increased due to steady balance growth, primarily driven by higher volumes from institutional customers.

Net fee income rose by 28 per cent, within which financing fees increased strongly due to a notable expansion in syndicated transaction volumes generated by HSBC’s leveraged and acquisition finance business.

Increased income from securities services reflected growth in assets under administration and custody, which rose by 30 per cent and 19 per cent, respectively, from a rise in business volumes, an increase in new clients and higher market values.

Income from trading activities also increased, largely in the areas of structured derivatives and equities. Structured derivatives reported a 44 per cent rise, reflecting success in delivering risk management and investment solutions. HSBC benefited from recognising income deferred in previous periods as markets became more liquid and price transparency improved on more complex products. Excluding a US$93 million gain from the disposal of shares in Euronext N.V., revenues in the equities business rose by 87 per cent, led by a strong performance in equity financing and cash equities in the buoyant market environment. Foreign exchange revenues were broadly in line with last year.

Gains from sales of financial investments increased threefold to US$651 million, primarily due to successful private equity disposals in the UK and France.

A net recovery on loan impairment charges, albeit lower than that reported in the first half of 2006, reflected the continuation of the benign corporate credit environment.

Operating expenses rose by 16 per cent to US$2,513 million, with the growth in expenses being lower than revenue growth. In Global Markets,

increased volumes, particularly in structured derivatives, led to a modest rise in staff numbers. Higher profitability resulted in increased performance-related costs.

HSBC’s share of profits from associates improved significantly, due to the non-recurrence of an impairment charge on a private equity investment held by an associate in the first half of 2006.

Private Banking continued to deliver robust growth, reporting profit before tax of US$493 million, 23 per cent higher than in the first half of 2006. The cost efficiency ratio of 52.5 per cent was 4.3 percentage points better than a year ago. Particularly good performances were recorded in the UK and Monaco, where the entrepreneurial client bases were very active in managing their portfolios. There was strong demand for wealth management services, and improved cooperation with other HSBC businesses led to increased cross-referrals. Organic growth more than compensated for a reduction in one-off revenues and an adverse fair value movement on non-qualifying hedges.

Net interest income increased by 10 per cent to US$365 million, largely due to balance sheet growth. The business in Switzerland was the main contributor to the rise, with an increase in net interest income of 24 per cent, driven by significant growth in loans and advances to customers. In the UK, an increased customer base and interest rate rises contributed to higher net interest income.

Net fee income of US$523 million was 5 per cent higher than in the first half of 2006, despite the non-recurrence of a US$36 million performance fee received from the Hermitage Fund in the first half of 2006. Growth was driven by increased funds under management. In Switzerland, client activity was focused upon higher-value structured products and investment in advisory and discretionary portfolios, from which fee income rose by 80 per cent.

Trading income in the first six months of 2007 of US$87 million was 38 per cent higher than in the first half of 2006. This increase, largely in Switzerland, was driven by elevated levels of private client foreign exchange activity.

Gains from financial investments doubled to US$42 million. The partial disposal of a seed capital investment in the Hermitage Fund realised gains of US$23 million. A US$7 million gain in France on the disposal of securities in the first half of 2006 did not recur in 2007.

Client assets, which include deposits and funds under management, rose by 8 per cent to US$237 billion. Net new money of US$11 billion

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H S B C H O L D I N G S P L C

Business Review (continued)

was garnered in the first half of 2007, of which US$7 billion came from Switzerland. Significant inflows of net new money were also generated in Germany and Monaco. The ‘Investment Solutions’ suite of discretionary managed products continued to attract client investment, with the value of invested assets increasing by 34 per cent since 31 December 2006.

Operating expenses were 3 per cent higher than in the first half of 2006, driven by increased investment in infrastructure and branch expansion in support of business growth. This was largely offset by the effect of a change in pension arrangements.

The results of the HSBC Insurance Brokers group were allocated to HSBC’s customer groups in

the first half of 2007, having been reported within Other in 2006. As a consequence, net operating income before loan impairment charges and operating expenses were US$205 million and US$178 million, respectively, lower than in the first half of 2006, reducing profit before tax by US$27 million.

HSBC realised US$70 million from the sale of financial investments in the first half of 2007.

Also included within Other were fair value movements of US$203 million on HSBC’s own debt in issue and related swaps.

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Profit/(loss) before tax and balance sheet data by customer group and global business

Half-year to 30 June 2007

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other

elimination

Total

Europe

US$m

Net interest income

3,130

1,647

495

365

(1,749

)

3,920

Net fee income

1,428

1,066

1,108

523

–

4,144

Trading income/(expense) excluding net interest income

1,705

)

–

1,842

Net interest income/(expense) on trading activities

)

(268

)

1,749

1,496

Net trading income/(expense)

1,437

)

1,749

3,338

Net income/(expense) from financial instruments designated at fair value .

315

)

–

348

Gains less losses from financial investments

651

–

790

Dividend income

144

–

161

Net earned insurance premiums

1,380

109

–

)

–

1,480

Other operating income/(expense)

(110

)

(89

)

337

147

(32

)

262

Total operating income

6,206

2,775

4,170

1,031

293

(32

)

14,443

Net insurance claims¹

(1,245

)

–

(1,146

)

Net operating income before loan impairment charges and other credit risk provisions

4,961

2,874

4,170

1,031

293

(32

)

13,297

Loan impairment (charges)/recoveries and other credit risk provisions

(1,127

)

(256

)

–

(1,363

)

Net operating income

3,834

2,618

4,187

1,034

293

(32

)

11,934

Total operating expenses

(3,244

)

(1,382

)

(2,513

)

(541

)

(324

)

(7,972

)

Operating profit/(loss)

590

1,236

1,674

493

(31

)

–

3,962

Share of profit in associates and joint ventures

–

Profit before tax

604

1,236

1,674

493

–

4,050

Share of HSBC’s profit before tax

4.3

8.7

11.8

3.5

0.3

28.6

Cost efficiency ratio

65.4

48.1

60.3

52.5

110.6

60.0

Balance sheet data²

US$m

Loans and advances to customers (net)

149,789

87,247

165,028

25,544

500

428,108

Total assets

198,518

104,420

677,459

56,090

3,532

1,040,019

Customer accounts

166,282

83,421

153,196

54,893

716

458,508

Loans and advances to banks (net)³

66,281

Trading assets, financial instruments designated at fair value, and financial investments³

322,862

Deposits by banks³

85,104

For footnotes, see page 33.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data by customer group and global business (continued)

	Half-year to 30 June 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Europe	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income	2,711		1,367		429		322		20		(755	)	4,094
Net fee income	1,230		845		796		482		160		–		3,513
Trading income excluding net interest income	100		5		1,373		54		15		–		1,547
Net interest income/(expense) on trading activities	–		2		(124	)	7		–		755		640
Net trading income	100		7		1,249		61		15		755		2,187
Net income from financial instruments designated at fair value	11		1		4		–		113		–		129
Gains less losses from financial investments	32		12		198		20		4		–		266
Dividend income	–		2		113		4		2		–		121
Net earned insurance premiums	461		60		–		–		147		–		668
Other operating income	61		58		416		5		139		(46	)	633

Total operating income	4,606		2,352		3,205		894		600		(46	)	11,611
Net insurance claims¹	(181	)	(5	)	–		–		(101	)	–		(287	)

Net operating income before loan impairment charges and other credit risk provisions	4,425		2,347		3,205		894		499		(46	)	11,324
Loan impairment (charges)/recoveries and other credit risk provisions	(847	)	(145	)	56		1		–		–		(935	)

Net operating income	3,578		2,202		3,261		895		499		(46	)	10,389
Total operating expenses	(2,666	)	(1,126	)	(1,989	)	(507	)	(481	)	46		(6,723	)

Operating profit	912		1,076		1,272		388		18		–		3,666
Share of profit/(loss) in associates and joint ventures	–		–		(70	)	–		4		–		(66	)

Profit before tax	912		1,076		1,202		388		22		–		3,600


	%		%		%		%		%				%
Share of HSBC’s profit before tax	7.3		8.6		9.6		3.1		0.2				28.8
Cost efficiency ratio	60.2		48.0		62.1		56.7		96.4				59.4

Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	132,064		71,357		134,892		21,085		1				359,399
Total assets	157,214		85,445		475,006		45,739		4,204				767,608
Customer accounts	140,210		69,322		136,695		46,506		–				392,733
Loans and advances to banks (net)³					53,280
Trading assets, financial instruments designated at fair value, and financial investments³					207,563
Deposits by banks³					53,711

For footnotes, see page 33.

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	Half-year to 31 December 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Europe	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/(expense)	2,942		1,556		793		353		(6	)	(1,443	)	4,195
Net fee income	1,303		862		877		387		166		–		3,595
Trading income/(expense) excluding net interest income	19		22		1,263		45		(54	)	–		1,295
Net interest income/(expense) on trading activities	(6	)	13		(399	)	(5	)	1		1,443		1,047
Net trading income/(expense)	13		35		864		40		(53	)	1,443		2,342
Net income/(expense) from financial instruments designated at fair value	69		26		7		–		(87	)	–		15
Gains less losses from financial investments	5		10		215		129		(1	)	–		358
Dividend income	2		1		58		1		–		–		62
Net earned insurance premiums	518		50		–		–		62		–		630
Other operating income	67		45		541		8		117		17		795

Total operating income	4,919		2,585		3,355		918		198		17		11,992
Net insurance claims¹	(150	)	(14	)	–		–		(80	)	–		(244	)

Net operating income before loan impairment charges and other credit risk provisions	4,769		2,571		3,355		918		118		17		11,748
Loan impairment (charges)/recoveries and other credit risk provisions	(991	)	(241	)	8		1		3		–		(1,220	)

Net operating income	3,778		2,330		3,363		919		121		17		10,528
Total operating expenses	(2,781	)	(1,172	)	(2,235	)	(503	)	(440	)	(17	)	(7,148	)

Operating profit/(loss)	997		1,158		1,128		416		(319	)	–		3,380
Share of profit/(loss) in associates and joint ventures	–		–		(26	)	1		19		–		(6	)

Profit/(loss) before tax	997		1,158		1,102		417		(300	)	–		3,374


	%		%		%		%		%				%
Share of HSBC’s profit before tax	10.4		12.1		11.5		4.4		(3.1	)			35.3
Cost efficiency ratio	58.3		45.6		66.6		54.8		372.9				60.8

Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	147,507		81,430		140,277		23,283		2				392,499
Total assets	174,865		98,073		502,340		49,440		3,983				828,701
Customer accounts	152,411		80,312		139,416		47,223		3				419,365
Loans and advances to banks (net)³					63,788
Trading assets, financial instruments designated at fair value, and financial investments³					219,304
Deposits by banks³					65,963

1	Net insurance claims incurred and movement in policyholders’ liabilities.
2	Third party only.
3	These assets and liabilities were significant to Corporate, Investment Banking and Markets.

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H S B C H O L D I N G S P L C

Business Review (continued)

Hong Kong

Profit/(loss) before tax by customer group and global business

	Half-year to

	30 June		30 June	31 December
	2007		2006	2006
	US$m		US$m	US$m

Personal Financial Services	1,898		1,420	1,460
Commercial Banking	760		587	734
Corporate, Investment Banking and Markets	697		477	478
Private Banking	161		123	78
Other	(186	)	47	(222	)

Profit before tax	3,330		2,654	2,528

Profit before tax

	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Net interest income	2,568		2,158		2,527
Net fee income	1,439		1,000		1,056
Net trading income	469		306		311
Net income from financial instruments designated at fair value	210		6		254
Gains less losses from financial investments	32		122		40
Dividend income	17		59		2
Net earned insurance premiums	1,426		1,317		1,311
Other operating income	413		443		391

Total operating income	6,574		5,411		5,892
Net insurance claims incurred and movement in policyholders’ liabilities	(1,512	)	(1,193	)	(1,506	)

Net operating income before loan impairment charges and other credit risk provisions	5,062		4,218		4,386
Loan impairment charges and other credit risk provisions	(80	)	(70	)	(102	)

Net operating income	4,982		4,148		4,284
Total operating expenses	(1,665	)	(1,504	)	(1,765	)

Operating profit	3,317		2,644		2,519
Share of profit in associates and joint ventures	13		10		9

Profit before tax	3,330		2,654		2,528


	%		%		%
Share of HSBC’s profit before tax	23.5		21.2		26.4
Cost efficiency ratio	32.9		35.7		40.2
Period-end staff numbers (full-time equivalent)	27,066		26,739		27,586

Balance sheet data¹
	US$m		US$m		US$m
Loans and advances to customers (net)	89,918		86,154		84,282
Loans and advances to banks (net)	68,162		45,288		50,359
Trading assets, financial instruments designated at fair value, and financial investments	98,998		81,109		103,734
Total assets	300,681		246,781		272,428
Deposits by banks	10,383		5,816		4,799
Customer accounts	205,219		180,167		196,691

1	Third party only.

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Economic briefing

Hong Kong’s economy was robust in the first half of 2007, especially private consumption. Rising wages in the increasingly tight labour market, strong household savings and high asset values supported a sustained expansion of consumer spending which is expected to continue throughout the year. Despite rising wages, headline inflation was low and appeared set to remain so, aided in part by concessionary budget measures. Nevertheless, underlying cost pressures continued to increase. Overall, the property market became more active in the first half of 2007 after stagnating throughout 2006, as increasing levels of private development helped offset a fall in public investment in construction in the absence of large-scale infrastructure projects.

Review of business performance

HSBC’s operations in Hong Kong reported a pre-tax profit of US$3,330 million compared with US$2,654 million in the first half of 2006, an increase of 25 per cent. On an underlying basis, pre-tax profits grew by 26 per cent. Underlying net operating income increased by 21 per cent, significantly ahead of operating expenses, which grew by 11 per cent. In CIBM, income growth was driven by a marked improvement in balance sheet management income. In Personal Financial Services and Commercial Banking, balance sheet growth and improved cost efficiency drove a rise in pre-tax profits. Private Banking delivered an excellent performance as a result of strong balance sheet growth and increased demand for investment funds and discretionary products.

The following commentary is on an underlying basis.

Personal Financial Services reported a record pre-tax profit of US$1,898 million, an increase of 35 per cent compared with the first half of 2006. As a result of higher fee income and greater loan and deposit balances, net operating income rose by 28 per cent. This was despite a modest increase in loan impairment charges. Expenses also rose, though continued growth in key customer segments led to increased income and resulted in an improved cost efficiency ratio of 27.6 per cent.

Net interest income grew by 15 per cent to US$1,588 million as average deposit balances rose. Higher interest rates outside Hong Kong allowed total deposit spreads to widen, driven by spreads on foreign currency accounts. Average customer deposits grew by 9 per cent, benefiting from a series

of promotional campaigns and a competitive pricing strategy.

Stable domestic interest rates in 2007 and an improved economic environment underpinned the domestic property market, which became more active, but intense competition drove down mortgage loan rates. Nevertheless, HSBC continued to rank as one of the leaders in new loan sales, despite aggressive promotional offers and incentives from other banks.

Growth in net interest income was also attributable to a 15 per cent rise in credit card balances, where HSBC remained the market leader. Retailer discount offers, instalment plans and ‘lucky draw’ programmes stimulated increased customer spending. In addition, a mass acquisition programme brought the number of HSBC cards in circulation to 4.8 million, an increase of 9 per cent since 30 June 2006.

Successful product design and greater use of direct channels combined with strong investment market sentiment to deliver a 68 per cent increase in net fee income, to US$791 million. Fees from investment products increased by 111 per cent compared with the first half of 2006, as a steady stream of IPOs, inflows of capital and growth in retail participation in mainland China-related shares listed in Hong Kong collectively contributed to a buoyant stock market. Sales of unit trusts and retail securities increased, benefiting from the introduction of new funds, the launch of investment schemes and awareness campaigns, and the phased implementation of ‘WealthMaster’, a portfolio wealth management sales tool. Funds under management for investment products maintained a strong growth trend and were 35 per cent greater than at 30 June 2006.

Credit card fee income rose by 23 per cent, as promotional campaigns helped increase the number of cards in circulation and cardholder spending rose by 17 per cent as retail sales remained high.

In the life insurance business, HSBC focused on a suite of retirement planning services and launched simple and innovative investment-linked insurance products. As a result, life premiums increased by 30 per cent. Sales of non-life policies were supported by greater customer use of lower-cost distribution channels. The number of non-life policies sold through direct channels represented a significant percentage of the total policies sold.

Loan impairment charges remained low at US$74 million, US$19 million higher than in the first half of 2006. The rise in loan impairment

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H S B C H O L D I N G S P L C

Business Review (continued)

charges primarily reflected increased credit card lending, as the broader credit environment remained relatively benign.

Operating expenses were 13 per cent higher than in the first half of 2006. Branch expansion and refurbishment, and the addition of 9 new branches, resulted in increased premises costs. Staff costs also rose, driven by additional front office staff and performance-related expenses. The cost efficiency ratio improved, however, partly due to the increased use of direct channels.

Commercial Banking continued its recent impressive growth with a record pre-tax profit of US$760 million, 30 per cent higher than in the first half of 2006. Strong liability growth was complemented by the active management of spreads on foreign currency savings in a highly competitive market. Dedicated small business centres and the recruitment of extra staff produced award-winning service and, along with customer-focused product development and active marketing, increased the revenue base. The cost efficiency ratio improved by 2.5 percentage points to 24.5 per cent as revenues grew at a significantly faster rate than costs.

Net interest income increased by 18 per cent, as new accounts and strong demand for savings and time deposit products led to higher average liability balances. While domestic interest rates remained stable following rises in 2006, local currency deposits increased substantially due to strong economic growth and the performance of the stock market in Hong Kong. Foreign currency deposits also increased significantly as global interest rates rose. Promotional activities solidified HSBC’s position as the most recommended bank for small and mid-market entities and, in conjunction with an external referral programme, contributed to the opening of more than 16,000 additional BusinessVantage accounts. Call centre sales capabilities were enhanced, facilitating increased sales of packaged products to small and micro businesses.

Total lending facilities increased by 18 per cent. Non-trade lending balances also increased by 18 per cent as the local economy continued to grow and demand for credit remained high. Cross-border lending to manufacturers with operations in mainland China continued to be strong as intra-Asia trade expanded. Asset spreads were generally tighter as a result of market competition, particularly for corporate and mid-market business customers.

Net fee income of US$250 million was 15 per cent higher than in the first half of 2006. Cash management and remittance fees increased by 9 per

cent, driven by rising trade flows and accelerated service times. Demand for investment products was robust as a result of buoyant equity markets in both mainland China and Hong Kong, which were bolstered by the loosening of restrictions in the former on cross-border investments. This generated significant increases in income from unit trusts, structured products and trading income.

Following realignment of the sales force, the Commercial Banking insurance business experienced strong growth, with a 7 per cent rise in insurance fee income. Net earned insurance premiums were 25 per cent higher, but were offset by higher claims.

The business card launched by HSBC in 2006 became Hong Kong’s leading such card in the first half of 2007, generating new revenues. The contribution from the commercial card acquiring business fell compared with the first half of 2006, due to the transfer of the card acquiring business to a joint venture with Global Payments Inc. in July 2006.

Loan impairment charges fell sharply by 97 per cent, due to a limited number of new loan impairment charges. Credit quality remained strong despite rising costs faced by manufacturers.

Total expenses rose by 7 per cent, compared with revenue growth of 18 per cent. Direct channels were used for more than a third of all transactions and this contributed to efficiencies that mitigated the increased cost of processing higher volumes. In addition, customers increasingly embraced the commercial-only branches which were launched in 2006 and provide enhanced services at a lower cost than existing branches. Recruitment of sales and insurance staff continued, with over 100 additional staff hired to support expanded insurance operations and product initiatives. Employee costs, including performance-related expenses, rose accordingly, while other expenses remained broadly stable.

Corporate, Investment Banking and Markets in Hong Kong reported a pre-tax profit of US$697 million, which represented 17 per cent of the global business’s pre-tax profits, and a rise of 47 per cent compared with the first half of 2006. This was principally due to significant revenue growth in balance sheet management and Global Markets. The cost efficiency ratio improved by 8.3 percentage points.

Total operating income of US$1,181 million was 34 per cent higher than in the first half of 2006, as client-driven revenues grew, reflecting the continued expansion of the local economy.

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Net interest income rose significantly, primarily due to a recovery of revenues in balance sheet management. In Global Banking, the rising interest rate environment boosted deposit growth and contributed to an improvement in related margins, partly mitigating continued lending margin compression resulting from strong local competition.

Net fee income increased by 13 per cent, driven by the underlying strength of capital markets. Higher revenues from securities services and debt underwriting activity reflected increased client volumes, encouraged by continuing investor confidence in the buoyant local stock market. This was partially offset by a significant reduction in structured finance fees, the result of lower transaction volumes.

In Group Investment Businesses, robust performance reflected continued growth in domestic markets and strong sales of multi-manager funds.

The rise in net trading income was primarily driven by higher revenues from credit and rates, structured derivatives and equities. The revenue growth was the consequence of greater market volatility and the success of initiatives taken in previous years to extend the product range. Higher customer volumes were achieved as the distribution of CIBM’s products to HSBC’s personal, private banking and commercial customers increased.

The rise in other operating income reflected higher revenues in the form of expenses incurred in Hong Kong recovered from other regions.

The overall credit environment remained benign with a small loan impairment charge, compared with a net release in 2006.

Operating expenses of US$474 million rose by 11 per cent, 23 percentage points less than revenue growth. The increase was primarily due to selective investment in Global Markets, particularly in the equities, structured derivatives and securities services. Staff costs rose, due to performance-related costs which increased in line with revenues, and the first full half-year effect of staff recruited in 2006.

Private Banking recorded a pre-tax profit of US$161 million, 32 per cent higher than in the first half of 2006. The cost efficiency ratio improved nearly one percentage point to 40.4 per cent. Strong

balance sheet growth and demand from clients for investment in structured products and investment funds underpinned the impressive performance in the first half of 2007.

Net interest income grew very strongly, rising by 44 per cent to US$49 million. A substantial increase was recorded in deposit balances following client acquisition and this, together with improved treasury performance in a higher interest rate environment than in the early part of 2006, were the main drivers of the increase in net interest income. Loans and advances to customers were significantly higher than in the corresponding period in 2006, as clients borrowed to fund investment in the equity markets, notably through the use of structured equity products.

The impressive growth in fee income continued, increasing by 38 per cent to US$80 million. Buoyant stock market performance sustained client demand for structured equity products, including the Forward Accumulator product. In June, HSBC launched the MultiAlpha China Fund, with over one quarter of the US$1.1 billion raised placed by Private Banking in Hong Kong. The launch of a number of other investment funds and an increase in performance fees received from discretionary managed products also contributed to the overall growth.

Client assets rose by 22 per cent compared with 31 December 2006, reaching US$62 billion. Net new money inflows during the six months to 30 June 2007 were US$5 billion, with strong client appetite for investment funds and discretionary products. The value of funds invested in HSBC’s Investment Solutions suite of discretionary managed products reached US$2.1 billion, a 47 per cent increase since 31 December 2006.

Operating expenses for the six months to 30 June 2007 were US$109 million, 27 per cent higher than in the first half of 2006. This was mainly due to the recruitment of new, largely front-office, staff to support increased levels of activity. Performance-related remuneration rose as a consequence of higher revenue.

Other was lower due to the non-recurrence of two large gains reported in the first half of 2006: US$101 million arising on the sale of part of HSBC’s stake in UTI Bank Limited, an Indian retail bank, and US$100 million from the disposal of Hang Seng Bank Limited’s head office building.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data by customer group and global business

Half-year to 30 June 2007

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other

elimination

Total

Hong Kong

US$m

Net interest income/(expense)

1,588

726

418

(372

)

159

2,568

Net fee income

791

250

318

–

1,439

Trading income/(expense) excluding net interest income

302

130

(13

)

–

525

Net interest income on trading activities

–

(159

)

(56

)

Net trading income

382

130

(159

)

469

Net income/(expense) from financial instruments designated at fair value

273

(36

)

–

(28

)

–

210

Gains less losses from financial investments

–

Dividend income

–

Net earned insurance premiums

1,366

–

1,426

Other operating income

390

(152

)

413

Total operating income

4,192

1,040

1,181

270

(152

)

6,574

Net insurance claims¹

(1,473

)

(34

)

–

(1,512

)

Net operating income before loan impairment charges and other credit risk provisions

2,719

1,006

1,176

270

(152

)

5,062

Loan impairment charges and other credit risk provisions

(74

)

–

(80

)

Net operating income

2,645

1,005

1,171

270

(152

)

4,982

Total operating expenses

(750

)

(246

)

(474

)

(109

)

(238

)

152

(1,665

)

Operating profit/(loss)

1,895

759

697

161

(195

)

–

3,317

Share of profit in associates and joint ventures

–

Profit/(loss) before tax

1,898

760

697

161

(186

)

–

3,330

Share of HSBC’s profit before tax

13.4

5.4

4.9

1.1

(1.3

)

23.5

Cost efficiency ratio

27.6

24.5

40.3

40.4

553.5

32.9

Balance sheet data²

US$m

Loans and advances to customers (net)

39,375

25,105

19,231

4,309

1,898

89,918

Total assets

62,199

31,043

163,766

12,553

31,120

300,681

Customer accounts

120,638

44,719

26,978

12,340

544

205,219

Loans and advances to banks (net)³

61,850

Trading assets, financial instruments designated at fair value, and financial investments³

72,996

Deposits by banks³

9,991

For footnotes, see page 40.

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	Half-year to 30 June 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Hong Kong	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/(expense)	1,383		622		213		34		(312	)	218		2,158
Net fee income/(expense)	477		219		282		58		(36	)	–		1,000
Trading income/(expense) excluding net interest income	44		27		333		105		(55	)	–		454
Net interest income on trading activities	2		–		19		–		49		(218	)	(148	)
Net trading income/(expense) .	46		27		352		105		(6	)	(218	)	306
Net income/(expense) from financial instruments designated at fair value	17		(41	)	2		–		28		–		6
Gains less losses from financial investments	11		–		(1	)	6		106		–		122
Dividend income	–		–		1		–		58		–		59
Net earned insurance premiums	1,265		44		8		–		–		–		1,317
Other operating income	104		9		32		5		425		(132	)	443

Total operating income	3,303		880		889		208		263		(132	)	5,411
Net insurance claims¹	(1,164	)	(23	)	(6	)	–		–		–		(1,193	)

Net operating income before loan impairment charges and other credit risk provisions	2,139		857		883		208		263		(132	)	4,218
Loan impairment (charges)/ recoveries and other credit risk provisions	(55	)	(38	)	23		–		–		–		(70	)

Net operating income	2,084		819		906		208		263		(132	)	4,148
Total operating expenses	(666	)	(232	)	(429	)	(85	)	(224	)	132		(1,504	)

Operating profit	1,418		587		477		123		39		–		2,644
Share of profit in associates and joint ventures	2		–		–		–		8		–		10

Profit before tax	1,420		587		477		123		47		–		2,654


	%		%		%		%		%				%
Share of HSBC’s profit before tax	11.3		4.7		3.8		1.0		0.4				21.2
Cost efficiency ratio	31.1		27.1		48.6		40.9		85.2				35.7

Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	34,944		21,932		23,997		3,376		1,905				86,154
Total assets	55,544		27,626		135,938		9,694		17,979				246,781
Customer accounts	110,536		36,234		22,550		10,502		345				180,167
Loans and advances to banks (net)³					40,230
Trading assets, financial instruments designated at fair value, and financial investments³					62,845
Deposits by banks³					5,379

For footnotes, see page 40.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data by customer group and global business (continued)

	Half-year to 31 December 2006

					Corporate
	Personal				Investment,						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Hong Kong	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/(expense)	1,499		722		340		42		(334	)	258		2,527
Net fee income	500		235		252		65		4		–		1,056

Trading income excluding net interest income	40		30		240		71		89		–		470
Net interest income on trading activities	2		–		69		–		28		(258	)	(159	)
Net trading income	42		30		309		71		117		(258	)	311
Net income/(expense) from financial instruments designated at fair value	356		(12	)	3		1		(94	)	–		254
Gains less losses from financial investments	3		–		–		3		34		–		40
Dividend income	1		1		1		–		(1	)	–		2
Net earned insurance premiums	1,254		51		6		–		–		–		1,311
Other operating income	98		24		49		8		356		(144	)	391

Total operating income	3,753		1,051		960		190		82		(144	)	5,892
Net insurance claims¹	(1,474	)	(27	)	(5	)	–		–		–		(1,506	)

Net operating income before loan impairment charges and other credit risk provisions	2,279		1,024		955		190		82		(144	)	4,386
Loan impairment (charges)/ recoveries and other credit risk provisions	(64	)	(31	)	4		–		(11	)	–		(102	)

Net operating income	2,215		993		959		190		71		(144	)	4,284
Total operating expenses	(756	)	(259	)	(482	)	(112	)	(300	)	144		(1,765	)

Operating profit/(loss)	1,459		734		477		78		(229	)	–		2,519

Share of profit in associates and joint ventures	1		–		1		–		7		–		9

Profit/(loss) before tax	1,460		734		478		78		(222	)	–		2,528

	%		%		%		%		%				%
Share of HSBC’s profit before tax	15.3		7.7		4.9		0.8		(2.3	)			26.4
Cost efficiency ratio	33.2		25.3		50.5		58.9		365.9				40.2
Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	35,445		23,520		20,270		3,081		1,966				84,282
Total assets	57,348		29,786		153,200		10,462		21,632				272,428
Customer accounts	118,201		41,493		24,530		11,991		476				196,691
Loans and advances to banks (net)³					45,023
Trading assets, financial instruments designated at fair value, and financial investments³					80,036
Deposits by banks³					4,363


1	Net insurance claims incurred and movement in policyholders’ liabilities.
2	Third party only.
3	These assets and liabilities were significant to Corporate, Investment Banking and Markets.

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Rest of Asia-Pacific (including the Middle East)

Profit/(loss) before tax by country within customer groups and global businesses

					Corporate,
	Personal				Investment
	Financial		Commercial		Banking &	Private
	Services		Banking		Markets	Banking		Other		Total
	US$m		US$m		US$m	US$m		US$m		US$m
Half-year to 30 June 2007
Australia	19		16		16	–		–		51
India	(13	)	49		211	–		52		299
Indonesia	2		15		46	–		(5	)	58
Japan	(8	)	(1	)	26	1		–		18
Mainland China	168		171		126	–		1,084		1,549
Malaysia	40		28		70	1		6		145
Middle East	125		220		216	1		44		606
Egypt	7		22		24	–		19		72
United Arab Emirates	62		139		93	1		–		295
Other Middle East	37		41		53	–		(3	)	128

Middle East (excluding Saudi Arabia)	106		202		170	1		16		495
Saudi Arabia	19		18		46	–		28		111
Singapore	50		60		105	51		1		267
South Korea	(15	)	(8	)	66	–		15		58
Taiwan	(35	)	13		64	–		1		43
Other	18		34		152	2		44		250

	351		597		1,098	56		1,242		3,344

Half-year to 30 June 2006
Australia	12		17		20	–		–		49
India	–		22		143	1		49		215
Indonesia	(12	)	16		35	–		(12	)	27
Japan	–		(2	)	28	(1	)	–		25
Mainland China	94		106		73	–		7		280
Malaysia	37		42		49	(1	)	1		128
Middle East	160		185		201	1		12		559
Egypt	5		20		17	–		9		51
United Arab Emirates	38		105		60	–		–		203
Other Middle East	39		41		44	1		(1	)	124

Middle East (excluding Saudi Arabia)	82		166		121	1		8		378
Saudi Arabia	78		19		80	–		4		181
Singapore	35		42		72	42		(6	)	185
South Korea	(15	)	(8	)	63	–		8		48
Taiwan	(117	)	14		60	–		–		(43	)
Other	11		64		95	6		8		184

	205		498		839	48		67		1,657

Half-year to 31 December 2006
Australia	64		15		26	–		–		105
India	(24	)	24		134	1		43		178
Indonesia	(10	)	30		34	–		(10	)	44
Japan	(3	)	–		21	–		80		98
Mainland China	182		135		94	–		17		428
Malaysia	40		45		50	–		11		146
Middle East	75		171		195	1		34		476
Egypt	4		21		18	–		11		54
United Arab Emirates	30		97		78	–		(2	)	203
Other Middle East	22		33		39	1		–		95

Middle East (excluding Saudi Arabia)	56		151		135	1		9		352
Saudi Arabia	19		20		60	–		25		124
Singapore	38		48		73	26		(5	)	180
South Korea	(40	)	(12	)	52	–		11		11
Taiwan	(62	)	23		58	–		1		20
Other	12		57		73	4		38		184

	272		536		810	32		220		1,870

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H S B C H O L D I N G S P L C

Business Review (continued)

Loans and advances to customers (net) by country

	Half-year to

	30 June	30 June	31 December
	2007	2006	2006
	US$m	US$m	US$m

Australia	9,845	9,824	8,775
India	6,216	4,139	4,915
Indonesia	1,296	1,297	1,337
Japan	3,580	3,581	3,391
Mainland China	6,787	5,477	6,065
Malaysia	8,003	7,150	7,747
Middle East (excluding Saudi Arabia)	17,047	14,553	15,622
Egypt	1,196	963	965
United Arab Emirates	10,928	9,433	10,122
Other Middle East	4,923	4,157	4,535
Singapore	10,768	10,108	9,610
South Korea	6,458	5,623	6,260
Taiwan	3,834	3,977	3,974
Other	14,340	9,110	9,878

	88,174	74,839	77,574

Customer accounts by country
	Half-year to

	30 June	30 June	31 December
	2007	2006	2006
	US$m	US$m	US$m

Australia	10,345	7,652	8,491
India	8,827	5,861	7,936
Indonesia	2,082	2,090	2,082
Japan	3,944	6,069	4,186
Mainland China	9,229	5,825	6,941
Malaysia	10,629	8,500	9,640
Middle East (excluding Saudi Arabia)	26,277	17,517	21,196
Egypt	3,358	2,318	2,703
United Arab Emirates	15,362	9,200	11,166
Other Middle East	7,557	5,999	7,327
Singapore	25,885	21,007	23,517
South Korea	4,705	3,297	3,890
Taiwan	9,208	7,522	7,675
Other	16,328	11,919	13,441

	127,459	97,259	108,995

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Profit before tax

			Half-year to

	30 June		30 June		31 December
	2007		2006		2006
Rest of Asia-Pacific (including the Middle East)	US$m		US$m		US$m

Net interest income	1,901		1,479		1,568
Net fee income	1,010		785		837
Net trading income	797		551		630
Net income/(expense) from financial instruments designated at fair value	78		(5	)	84
Gains less losses from financial investments	26		27		14
Gains arising from dilution of interests in associates	1,076		–		–
Dividend income	4		–		5
Net earned insurance premiums	109		89		85
Other operating income	360		288		477

Total operating income	5,361		3,214		3,700
Net insurance claims incurred and movement in policyholders’ liabilities	(141	)	(63	)	(129	)

Net operating income before loan impairment charges and other credit risk provisions	5,220		3,151		3,571
Loan impairment charges and other credit risk provisions	(308	)	(271	)	(241	)

Net operating income	4,912		2,880		3,330
Total operating expenses	(2,075	)	(1,609	)	(1,939	)

Operating profit	2,837		1,271		1,391
Share of profit in associates and joint ventures	507		386		479

Profit before tax	3,344		1,657		1,870


	%		%		%
Share of HSBC’s profit before tax	23.6		13.2		19.5
Cost efficiency ratio	39.8		51.1		54.3
Period-end staff numbers (full-time equivalent)	81,031		63,299		72,265

Balance sheet data¹
	US$m		US$m		US$m
Loans and advances to customers (net)	88,174		74,839		77,574
Loans and advances to banks (net)	34,678		26,459		27,517
Trading assets, financial instruments designated at fair value, and financial investments	52,189		38,538		41,585
Total assets	201,123		168,857		167,668
Deposits by banks	13,709		9,179		10,323
Customer accounts	127,459		97,259		108,995


1	Third party only.

Economic briefing

Mainland China’s economy continued to expand strongly, as GDP growth accelerated to 11.5 per cent in the first half of 2007 as urban fixed-asset investment also rose. Higher incomes triggered the fastest growth in retail sales for 10 years. Despite a slowdown in US GDP growth, Chinese exports remained strong. Concerns about CPI inflation emerged as it exceeded 3 per cent year-on-year in March, but much of this was due to supply shocks in the food sector, notably the effect on food prices of a disease among pigs. These events prompted fresh measures to tighten the economy, though they were

moderate and the authorities demonstrated no desire to slow growth too sharply. As a result, bank credit and broad money supply in June grew by more than 16 per cent and 17 per cent, respectively, year-on-year. The government also moved to gently deflate the stock market by raising transaction taxes. The renminbi continued its gradual appreciation against the US dollar.

Japan’s economy, which remains the largest in the region, continued to expand in the first half of 2007. Exports rose steadily, while growth of private capital investment remained firm and consumer spending rebounded. Core consumer prices fell,

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H S B C H O L D I N G S P L C

Business Review (continued)

however, making it difficult for the Bank of Japan to raise interest rates. Corporate sector borrowing continued to recover, although at a modest pace.

The economies of the Middle East continued to perform well in the first half of 2007. Although headline growth rates were less than those seen in the past four years, as oil prices moderated and OPEC-mandated production cuts started to take effect, underlying performance remained very strong. Household and government consumption continued their recent upward trend as oil revenues fed into the domestic economies, supported by low real interest rates and significant population growth. Investment spending was also strong, focusing on infrastructure projects sponsored and, in some cases, financed by government. Public finances, trade and current account positions all remained robust. Domestic demand, high liquidity and the weakness of the US dollar boosted inflationary pressures although, generally, price rises remained at around 5 per cent. The region’s equity markets began to bounce back from the lows of 2005 and 2006, with the exception of Saudi Arabia, which was subdued.

Elsewhere in Asia, most economies continued to perform impressively in the first half of 2007, particularly India, Vietnam, Indonesia, the Philippines and Singapore. Export growth slowed moderately, partly due to inventory adjustment in technology sectors, although domestic consumption and investment demand generally improved, the latter in response to high capacity utilisation, low interest rates and quickening credit growth. Despite strong domestic growth and continued firmness in commodity prices, there was a general, and substantial, reduction in inflation as the effect of previous oil price rises dropped out and many currencies strengthened against the US dollar. In Indonesia and Thailand, monetary policy was eased, while in most other countries it was kept largely unchanged. The main exception was India, where consumer price inflation accelerated considerably and the Reserve Bank of India is expected to tighten monetary policy. Asian currencies were generally mixed against the US dollar in the first half of 2007, though the Indian rupee, Indonesian rupiah, Malaysian ringgit, Philippine peso and Thai baht all strengthened.

Review of business performance

HSBC’s operations in the Rest of Asia-Pacific region reported a pre-tax profit of US$3,344 million compared with US$1,657 million in the first half of 2006, an increase of 102 per cent. On an underlying basis, pre-tax profits grew by 96 per cent. During the period, exceptional profits of US$1,076 million were

recognised in the ‘Other’ segment following share offerings by HSBC’s associates, Ping An Insurance, Bank of Communications and Industrial Bank. Excluding these dilution gains and on an underlying basis, profit before tax increased by 33 per cent.

HSBC’s focus on emerging markets supported continued growth in the region, with underlying net operating income (excluding dilution gains) increasing by 29 per cent, driven by strong performances in mainland China, India, the Middle East and Singapore.

CIBM’s increased profit before tax, largely from the success of coordinated global service product offerings. The rise in Commercial Banking revenues was driven by active customer acquisition and balance sheet growth. In Personal Financial Services, profit before tax increased as a result of balance sheet growth and higher fee income. Loan impairment charges decreased and credit conditions remained benign. Private Banking delivered solid progress in light of growing wealth in the region.

The following commentary is on an underlying basis.

Personal Financial Services reported a pre-tax profit of US$351 million, an increase of 62 per cent compared with the first half of 2006. Net operating income increased due to balance sheet growth and higher fee income. Loan impairment charges declined by 14 per cent and credit conditions remained benign. Continued investment in new branches and the expansion of operations caused the cost efficiency ratio to rise slightly to 68.9 per cent.

Across the region, HSBC achieved significant profit before tax growth, with six countries reporting increases of over 30 per cent. Overall, HSBC attracted 800,000 more customers than at 30 June 2006, more than half of which were located in India.

In mainland China, pre-tax profit grew by 73 per cent as a result of strong performances from associates and notable deposit growth following a 36 per cent increase in the number of customers in the operating business.

In Singapore, pre-tax profit increased by 35 per cent, as insurance increased its contribution to the business and asset spreads improved.

In the Middle East outside Saudi Arabia, pre-tax profit increased by 32 per cent. Volume-driven growth in net interest income and fees, particularly in the United Arab Emirates, drove improved performance. There was a reduced contribution from HSBC’s associate, The Saudi British Bank, as a

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result of lower stock market activity following a correction to the market in 2006.

Net interest income rose by 22 per cent, due to higher asset and deposit balances. Average deposit balances increased by 32 per cent as the Group focused on growing the mass-affluent Premier customer base. India, Singapore, and the Middle East experienced the strongest deposit growth. Other deposit initiatives included HSBC Direct in Taiwan and South Korea, which generated 120,000 new accounts, with total savings balances exceeding US$900 million, and renminbi-denominated services designed to attract new Premier clients in eight priority cities in mainland China.

Average asset balances increased and spreads widened. Average loans and advances to customers rose by 42 per cent, as both credit card and personal lending grew. Growth in the latter was particularly robust in India following the expansion of the branch network there and greater marketing activity.

Cards in circulation rose to 8.3 million and card balances were 23 per cent higher than at 30 June 2006. HSBC continued to benefit from increased cardholder spending, which grew by 32 per cent. In the Middle East, credit card balances rose by 47 per cent, due in part to a successful promotional initiative.

Average mortgage balances remained broadly in line with the first half of 2006, notwithstanding the sale of a mortgage portfolio in Australia in the second half of 2006. Excluding that transaction, growth was 7 per cent as a result of demand across the region.

Net fee income rose by 25 per cent to US$336 million, with continued strong growth in the cards and wealth management businesses. Compared with the first half of 2006, HSBC increased the number of customers in its key Premier segment by 32 per cent.

Sales of investment products across the region increased by 23 per cent. Particularly strong sales were recorded in the Middle East, South Korea, Malaysia and Singapore. In mainland China, HSBC was among the first to launch an expanded ‘Qualified Domestic Institutional Investor’ offering, providing residents with a new renminbi-denominated product. Overall, funds under management in the region grew by 12 per cent to US$10.3 billion.

Insurance premiums increased due to consumer demand and the expansion of HSBC’s distribution capabilities. This was partially offset by higher net claims. In Malaysia, HSBC Amanah Takaful

launched the first shariah-compliant investment-linked structured product.

Loan impairment charges and other credit risk provisions fell by 14 per cent. In Indonesia, higher recoveries resulted from improved collection efforts and, in Taiwan, lower impairment charges were recorded, mainly due to the government debt negotiation mechanism that led to a deterioration in the credit environment and higher impairment charges in the first half of 2006. This was partially offset by higher charges for cards in India, Malaysia and Thailand.

Additional investment in building distribution platforms led to a 24 per cent rise in operating expenses to US$911 million, with the Middle East, India, South Korea and Indonesia experiencing the most substantial increases. In the Middle East, client-facing staff were hired to augment sales of loans, cards and mortgages, and IT expenditure on new internet banking and credit card infrastructure rose. In India and Indonesia, card and consumer finance-related investment costs were incurred to expand these businesses. In South Korea, increased staff and infrastructure expenditure was related to the implementation of HSBC Direct.

Income from HSBC’s investments in associates increased by 9 per cent, due to the strong performance of Ping An Insurance. In the Middle East, The Saudi British Bank’s performance decreased compared with the first half of 2006, due to the ongoing effects of a correction in the local stock market in the middle of 2006.

Commercial Banking reported a record profit before tax of US$597 million, 17 per cent higher than in the first half of 2006. The dynamic performance of the region’s economies supported active customer acquisition and strong balance sheet growth. Several major areas in the region reported increases in profit before tax in excess of 30 per cent, with outstanding performances in India, Singapore, mainland China and the United Arab Emirates. Notwithstanding expansion of these businesses through investments in staff, infrastructure and new products, the cost efficiency ratio improved by 1.8 percentage points.

HSBC’s Middle East operations continued to benefit from strong economic growth. Profit before tax grew by 18 per cent as a result of improved balance sheet utilisation, supported by a benign credit environment and greater transaction banking revenues. Profit before tax rose by 12 per cent in Egypt compared with the first half of 2006, but strong revenue growth was masked by fewer loan impairment releases.

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H S B C H O L D I N G S P L C

Business Review (continued)

In India and Singapore, profit before tax grew by 110 per cent and 35 per cent respectively, as net interest income benefited from higher deposit balances.

The local incorporation of HSBC’s business in mainland China added impetus to its operations by permitting the scope of services to be expanded, contributing to growth in profit before tax of 55 per cent.

In Australia, total revenues grew by 16 per cent due to new client acquisitions. Profit before tax growth was lower, however, due to the non-recurrence of impairment releases in 2006.

HSBC continued to develop its cross-border capabilities and initiatives for small businesses, rolling out small-business banking in Bahrain, Qatar and Jordan. An additional six International Banking Centres were opened in the Middle East and one in Mauritius, bringing the total in the Rest of Asia-Pacific region to 16. Country desks were established by HSBC in mainland China to facilitate cross-border transactions with South Korea and Taiwan.

Global relationship management capabilities were improved with the release of a centralised cross-border client relationship management database in ten countries. New relationship managers were recruited to the Dubai business banking unit for small business customers, increasing revenues by 39 per cent. The small and micro business customer base expanded with the implementation of a loyalty campaign, enhanced internet banking capabilities and the acquisition of Chailease Credit Services, a factoring company in Taiwan, to facilitate cross-border transactions.

Net interest income grew by 26 per cent to US$517 million, with the opening of 7 new branches in the region delivering deposit and loan growth. Campaigns targeted at growing deposit balances were initiated and growth in average deposits was 43 per cent. Interest rate rises contributed to higher deposit spreads.

In India, a strategic expansion into provincial cities helped trigger strong deposit and lending growth which combined with widening asset spreads to increase small and medium business income by 46 per cent.

In the Middle East, HSBC generated higher net interest income from increases in both liabilities and lending, particularly in the United Arab Emirates. Balances rose as regional liquidity growth underpinned an increase in domestic purchasing power in Middle Eastern countries. The resultant rise

in demand for goods and services stimulated trade in the region.

In mainland China, marketing campaigns stimulated strong growth in both assets and liabilities. Net interest income also benefited from a significant increase in liability spreads, and a campaign for deposit accounts led customers to open new foreign currency accounts.

Lending balances in Malaysia grew after successful campaigns focused on identifying and following up on new business. The cross-border referral system used by HSBC, ‘Global Links’, and regional alignments were instrumental in growing successful referrals by 75 per cent. Campaigns targeted at increasing liability balances were launched in Taiwan and Australia.

Net fee income increased by 22 per cent, driven by higher trade services income and guarantee fees in the Middle East, and growth in credit and custody fees in India. HSBC introduced a number of initiatives to support small and medium business trade, including ‘TradeSmart’ in Malaysia and ‘Tradeline’ in Bangladesh. HSBC continued to invest in direct channel capabilities, and customers initiated more transactions using business internet banking.

Trading income increased by 32 per cent as a result of the recently launched online e-trading platform, which drove additional volume, and increased customer demand for hedging products in India and Singapore.

Revenues from insurance products in Singapore grew by 112 per cent as a result of increased general insurance business and higher investment income.

Loan impairment charges of US$54 million compared with net releases in 2006, largely due to higher loan volumes and fewer releases of allowances, particularly in Australia and Malaysia. Higher loan volumes and downgrades of a few customers in Sri Lanka, Thailand and Malaysia increased loan impairment charges but these were partly offset by recoveries on specific accounts in Singapore and Mauritius and reduced loan impairment charges in the Middle East, primarily due to the release of collective impairments. In the first half of 2006, there was a modest net recovery of loan impairment charges.

Total operating expenses grew by 20 per cent, driven by additional staff costs and performance-related expenses in India, the Middle East and mainland China. Higher costs in the region largely reflected increased sales and support staff for business initiatives and expansion. IT and marketing expenses were incurred in expanding direct banking

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capabilities in South Korea and adding new branches in India, mainland China and Malaysia. A dedicated Commercial Banking call centre was opened in the Philippines.

Income from associates increased by 43 per cent, as Ping An Insurance, Bank of Communications and Industrial Bank in mainland China all generated higher income.

Corporate, Investment Banking and Markets in Rest of Asia-Pacific reported a pre-tax profit of US$1,098 million, which represented 26 per cent of the global business’s pre-tax profits, and a rise of 28 per cent compared with the first half of 2006. The strong performance was driven by the effective distribution of global products to HSBC’s clients throughout the region. The cost efficiency ratio improved by 0.6 percentage points to 34.1 per cent.

In the Middle East, a 7 per cent rise in pre-tax profit reflected strong income streams across most major businesses. HSBC’s operations in India reported a 40 per cent increase in pre-tax profits with significant growth in net interest income and trading revenues.

In mainland China, pre-tax profits grew by 65 per cent, driven by strong growth in deposits and higher income from securities services and payments and cash management activities.

In each of Singapore, Thailand and Malaysia, CIBM reported increases in pre-tax profits of more than 30 per cent, primarily due to improvements in balance sheet management revenues and strong trading and fee income.

Total operating income increased by 27 per cent to US$1,494 million, against a backdrop of rapid growth in regional economies. Net interest income grew significantly, partly due to higher revenues in the payment and cash management business across most countries, with notable contributions from businesses in India, mainland China and Singapore. The benefit of higher deposit balances, driven by buoyant local economies, was enhanced by improved spreads following increases in interest rates. Balance sheet management also reported an increase, as funds from maturing assets were reinvested at higher yields.

Net fees increased by 25 per cent to US$409 million. Higher revenues in securities services reflected increased client volumes, encouraged by continuing investor confidence in local stock markets. Assets under custody grew significantly, in part due to the acquisition of Westpac’s sub-custody business in Australia and New Zealand in the second half of 2006.

The rise in net trading income was principally due to increased credit and rates and foreign exchange revenues across most countries, particularly in India, Indonesia, Malaysia and Thailand. Higher volumes were driven by increased volatility in foreign exchange and interest rates, as customer appetite for risk management products grew.

In the Middle East, the structured derivatives business gained momentum as demand for structured interest rate products from institutional and corporate customers continued. Underwriting and syndication fees were boosted by a number of high profile mandates, reflecting HSBC’s strength in distribution and market-making activities.

Loan impairment charges were broadly in line with the comparable period in 2006.

Operating expenses increased by 25 per cent, partly due to higher performance-related incentives in response to robust growth in operating income. Higher volumes in the payments and cash management and securities services businesses led to increases in operating expenses. In Global Markets, support costs increased, particularly IT-related costs, reflecting initiatives to strengthen HSBC’s operations in the region.

The share of profits in associates and joint ventures increased by 23 per cent reflecting higher contributions from HSBC’s investments in Bank of Communication and Industrial Bank.

In the first half of the year, Private Banking delivered solid progress and, in light of growing wealth in the region, continued to invest in the expanding business. Pre-tax profits of US$56 million were 17 per cent higher than in the first half of 2006. Growth in operating income was strong across the region, with the largest contribution from Singapore. In Japan and India, investment to expand HSBC’s Private Banking operations continued. The cost efficiency ratio of 48.6 per cent was 3.4 percentage points better than at 30 June 2006.

Net interest income rose by 56 per cent to US$28 million, driven primarily by enhanced treasury performance and higher lending to clients in Singapore.

Fee income of US$52 million was 33 per cent ahead of the first half of 2006. In Japan, strong sales of fund products following increased sales and marketing activity boosted fee income and, in Singapore, strong appetite among clients for exposure to strongly performing stock markets drove higher sales of structured products.

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H S B C H O L D I N G S P L C

Business Review (continued)

Trading and other operating income decreased due to the effect of interest rate increases on money market spreads.

Client assets were 7 per cent greater than at 31 December 2006, with most of the increase invested in equities and funds.

Operating expenses were slightly higher than in the first half of 2006, as continued investment expenditure in building up onshore operations in Japan and India was partly offset by the release of deferred compensation expenses in Singapore.

Other recorded dilution gains of US$1,076 million following share offerings made in Shanghai by HSBC’s three associates: Ping An Insurance, Bank of Communications and Industrial

Bank, which all successfully raised new capital. The consequent dilution of HSBC’s interests was considerably less than its share of the new monies raised, resulting in the gains recognised. For further details see Note 19 on the Financial Statements.

Activity in the Group Service Centres, primarily in India and China, continued to grow, reflecting expansion in the type and volume of tasks undertaken, supported by a 22 per cent increase in staff numbers to nearly 29,000. Costs rose by 32 per cent, substantially all of which were recharged to HSBC’s customer groups and global businesses.

During the first half of 2007, three additional Group Service Centres became operational, with a further two under development.

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Profit before tax and balance sheet data by customer group and global business

Half-year to 30 June 2007

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other

elimination

Total

Rest of Asia-Pacific (including the Middle East)

US$m

Net interest income

914

517

551

(175

)

1,901

Net fee income

336

202

409

–

1,010

Trading income excluding net interest income

475

–

606

Net interest income/(expense) on trading activities

)

–

175

191

Net trading income

489

175

797

Net income from financial instruments designated at fair value

–

Gains less losses from financial investments

–

Gains arising from dilution of interests in associates

–

1,076

–

1,076

Dividend income

–

Net earned insurance premiums

100

–

109

Other operating income

)

387

(69

)

360

Total operating income

1,460

801

1,494

109

1,566

(69

)

5,361

Net insurance claims¹

(137

)

–

(141

)

Net operating income before loan impairment charges and other credit risk provisions

1,323

797

1,494

109

1,566

(69

)

5,220

Loan impairment charges and other credit risk provisions

(252

)

(54

)

–

(308

)

Net operating income

1,071

743

1,492

109

1,566

(69

)

4,912

Total operating expenses

(911

)

(313

)

(510

)

(53

)

(357

)

(2,075

)

Operating profit

160

430

982

1,209

–

2,837

Share of profit in associates and joint ventures

191

167

116

–

507

Profit before tax

351

597

1,098

1,242

–

3,344

Share of HSBC’s profit before tax

2.5

4.2

7.8

0.4

8.7

23.6

Cost efficiency ratio

68.9

39.3

34.1

48.6

22.8

39.8

Balance sheet data²

US$m

Loans and advances to customers (net)

31,768

25,996

27,575

2,716

119

88,174

Total assets

38,544

31,553

116,396

6,791

7,839

201,123

Customer accounts

44,686

28,803

44,126

9,092

752

127,459

Loans and advances to banks (net)³

28,663

Trading assets, financial instruments designated at fair value, and financial investments³

46,674

Deposits by banks³

12,860

For footnotes, see page 51.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit before tax and balance sheet data by customer group and global business (continued)

	Half-year to 30 June 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Rest of Asia-Pacific (including the Middle East)	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income	720		400		405		18		33		(97	)	1,479
Net fee income	259		162		322		39		3		–		785
Trading income/(expense) excluding net interest income	28		43		376		43		(9	)	–		481
Net interest income/(expense) on trading activities	1		–		(28	)	–		–		97		70
Net trading income/(expense) .	29		43		348		43		(9	)	97		551
Net income/(expense) from financial instruments designated at fair value	(9	)	–		1		–		3		–		(5	)
Gains less losses from financial investments	–		2		28		(1	)	(2	)	–		27
Dividend income	–		–		–		–		–		–		–
Net earned insurance premiums	77		12		–		–		–		–		89
Other operating income	11		4		43		1		273		(44	)	288

Total operating income	1,087		623		1,147		100		301		(44	)	3,214
Net insurance claims¹	(57	)	(6	)	–		–		–		–		(63	)

Net operating income before loan impairment charges and other credit risk provisions	1,030		617		1,147		100		301		(44	)	3,151
Loan impairment (charges)/ recoveries and other credit risk provisions	(289	)	19		(1	)	–		–		–		(271	)

Net operating income	741		636		1,146		100		301		(44	)	2,880
Total operating expenses	(707	)	(252	)	(400	)	(52	)	(242	)	44		(1,609	)

Operating profit	34		384		746		48		59		–		1,271
Share of profit in associates and joint ventures	171		114		93		–		8		–		386

Profit before tax	205		498		839		48		67		–		1,657

	%		%		%		%		%				%

Share of HSBC’s profit before tax	1.6		4.0		6.7		0.4		0.5				13.2
Cost efficiency ratio	68.6		40.8		34.9		52.0		80.4				51.1
Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m

Loans and advances to customers (net)	28,879		19,784		23,589		2,460		127				74,839
Total assets	32,806		23,737		97,571		6,299		8,444				168,857
Customer accounts	34,932		20,436		34,350		7,399		142				97,259
Loans and advances to banks (net)³					20,652
Trading assets, financial instruments designated at fair value, and financial investments³					31,368
Deposits by banks³					8,527

For footnotes, see page 51.

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	Half-year to 31 December 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Rest of Asia-Pacific (including the Middle East)	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income	800		448		397		17		28		(122	)	1,568
Net fee income	265		168		366		29		9		–		837
Trading income excluding net interest income	33		43		341		31		6		–		454
Net interest income/(expense) on trading activities	(1	)	–		28		–		27		122		176
Net trading income	32		43		369		31		33		122		630
Net income from financial instruments designated at fair value	68		4		3		–		9		–		84
Gains less losses from financial investments	2		–		10		–		2		–		14
Dividend income	–		–		1		–		4		–		5
Net earned insurance premiums	71		14		–		–		–		–		85
Other operating income	97		16		18		(1	)	394		(47	)	477

Total operating income	1,335		693		1,164		76		479		(47	)	3,700
Net insurance claims¹	(123	)	(5	)	–		–		(1	)	–		(129	)

Net operating income before loan impairment charges and other credit risk provisions	1,212		688		1,164		76		478		(47	)	3,571
Loan impairment (charges)/recoveries and other credit risk provisions	(256	)	10		6		–		(1	)	–		(241	)

Net operating income	956		698		1,170		76		477		(47	)	3,330
Total operating expenses	(886	)	(302	)	(469	)	(44	)	(285	)	47		(1,939	)

Operating profit	70		396		701		32		192		–		1,391
Share of profit in associates and joint ventures	202		140		109		–		28		–		479

Profit before tax	272		536		810		32		220		–		1,870

	%		%		%		%		%				%

Share of HSBC’s profit before tax	2.8		5.6		8.5		0.3		2.3				19.5
Cost efficiency ratio	73.1		43.9		40.3		57.9		59.6				54.3
Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m

Loans and advances to customers (net)	28,911		21,912		24,311		2,313		127				77,574
Total assets	35,317		26,335		93,605		6,476		5,935				167,668
Customer accounts	38,557		24,228		36,623		8,929		658				108,995
Loans and advances to banks (net)³					22,171
Trading assets, financial instruments designated at fair value, and financial investments³					36,580
Deposits by banks³					9,849


1	Net insurance claims incurred and movement in policyholders’ liabilities.
2	Third party only.
3	These assets and liabilities were significant to Corporate, Investment Banking and Markets.

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H S B C H O L D I N G S P L C

Business Review (continued)

North America

Profit/(loss) before tax by country within customer groups and global businesses

			Corporate,
	Personal		Investment
	Financial	Commercial	Banking &		Private
	Services	Banking	Markets		Banking	Other		Total
	US$m	US$m	US$m		US$m	US$m		US$m

Half-year to 30 June 2007
United States	1,336	215	292		50	(44	)	1,849
Canada	145	222	120		4	2		493
Bermuda	7	40	24		6	16		93

	1,488	477	436		60	(26	)	2,435

Half-year to 30 June 2006¹
United States	2,886	206	273		37	(145	)	3,257
Canada	122	220	49		–	2		393
Bermuda	9	38	25		1	16		89
Other	–	–	2		–	–		2

	3,017	464	349		38	(127	)	3,741

Half-year to 31 December 2006
United States	242	236	(74	)	70	(119	)	355
Canada	131	217	140		–	15		503
Bermuda	1	40	6		6	13		66
Other	–	–	2		–	1		3

	374	493	74		76	(90	)	927

Loans and advances to customers (net) by country

	Half-year to

	30 June	30 June	31 December
	2007	2006¹	2006
	US$m	US$m	US$m

United States	233,592	227,690	236,188
Canada	45,510	39,181	39,584
Bermuda	2,193	1,999	2,215

	281,295	268,870	277,987

Customer accounts by country

	Half-year to

	30 June	30 June	31 December
	2007	2006¹	2006
	US$m	US$m	US$m

United States	93,325	86,053	84,560
Canada	32,744	28,989	28,668
Bermuda	8,328	8,464	7,694

	134,397	123,506	120,922


1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

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Profit before tax

			Half-year to

	30 June		30 June		31 December
	2007		2006¹		2006
North America	US$m		US$m		US$m

Net interest income	7,307		6,996		7,272
Net fee income	2,904		2,312		2,454
Net trading income	622		959		399
Net income/(expense) from financial instruments designated at fair value	81		24		(87	)
Gains less losses from financial investments	53		40		18
Dividend income	64		39		46
Net earned insurance premiums	231		238		254
Other operating income	342		365		557

Total operating income	11,604		10,973		10,913
Net insurance claims incurred and movement in policyholders’ liabilities	(124	)	(117	)	(142	)

Net operating income before loan impairment charges and other credit risk provisions	11,480		10,856		10,771
Loan impairment charges and other credit risk provisions	(3,820	)	(2,172	)	(4,624	)

Net operating income	7,660		8,684		6,147
Total operating expenses	(5,235	)	(4,974	)	(5,219	)

Operating profit	2,425		3,710		928
Share of profit in associates and joint ventures	10		31		(1	)

Profit before tax	2,435		3,741		927

	%		%		%
Share of HSBC’s profit before tax	17.2		29.9		9.7
Cost efficiency ratio	45.6		45.8		48.5
Period-end staff numbers (full-time equivalent)	56,693		54,884		55,642

Balance sheet data²
	US$m		US$m		US$m
Loans and advances to customers (net)	281,295		268,870		277,987
Loans and advances to banks (net)	18,643		16,753		17,865
Trading assets, financial instruments designated at fair value, and financial investments	149,004		141,631		145,700
Total assets	519,693		495,895		511,190
Deposits by banks	13,043		10,026		11,484
Customer accounts	134,397		123,506		120,922


1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.
2	Third party only.

Economic briefing

US economic growth slowed in the early part of 2007 but subsequently appeared to regain some momentum. Annualised real growth rates of 2 per cent and 2.5 per cent were recorded in GDP and consumer spending, respectively, in the first half of the year. The volume of residential investment dropped at an annualised rate of 12.8 per cent in the first part of 2007, however. Home building and home sales continued to fall, and home price appreciation slowed, with some regions experiencing outright declines in house prices. Employment conditions were characterised by steady job gains and an average unemployment rate of 4.5 per cent.

In June, total CPI inflation was 2.7 per cent year-on-year, reflecting higher food and fuel prices. However, core CPI (excluding food and energy) was 2.2 per cent, partly due to the general slowdown in the residential property market. Having last raised interest rates in June 2006, the Federal Reserve Board left the federal funds rate unchanged at 5.25 per cent throughout the first half of 2007.

Canada’s economic growth in early 2007 was solid, with annualised real GDP growth of 3.7 per cent in the first quarter. Strong housing market activity helped boost consumer spending on goods and services, which rose by 3.9 per cent annualised in the first quarter. Residential investment spending

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H S B C H O L D I N G S P L C

Business Review (continued)

rose by 7.5 per cent annualised in the first quarter, the first increase in a year. By contrast, investment in non-residential construction slowed while machinery and equipment investment fell for the first time since 2002. Core inflation in June rose to 2.2 per cent, the highest since March 2003. The Canadian dollar appreciated by more than 8 per cent against the US dollar in the first half of the year, boosted by strong demand and firm commodity prices. The Bank of Canada left the overnight target rate unchanged at 4.25 per cent throughout the period but raised rates by 25 basis points to 4.5 per cent in early July.

Review of business performance

HSBC’s operations in North America reported a pre-tax profit of US$2,435 million compared with US$3,741 million in the first half of 2006, a decrease of 35 per cent. Compared with the second half of 2006, profit before tax improved significantly.

On an underlying basis, pre-tax profits declined by 35 per cent. Underlying net operating income before loan impairment charges was 6 per cent higher, mainly as a result of increased net fee income from the card services business within Personal Financial Services. This was more than offset by increased loan impairment charges in the mortgage services and consumer lending businesses as a result of higher delinquencies. In part, this reflected the combination of higher lending and the deterioration in credit quality within the mortgage services business. It also reflected the abnormally low level of impairment recognised in the first half of 2006 as a consequence of bankruptcy law changes in the fourth quarter of 2005. A rise in Commercial Banking income, driven by balance sheet growth, covered increased expenses incurred in support of regional and business expansion. CIBM’s revenue increased by 8 per cent, notwithstanding lower balance sheet management income. In Private Banking, revenues increased, driven by a rise in customer numbers.

The following commentary is on an underlying basis.

Personal Financial Services generated a pre-tax profit of US$1,488 million, down by 51 per cent on the first half of 2006 but a substantial recovery of 301 per cent compared with the second half of the year. The combination of higher loan impairment charges, increased collection expenses in mortgage services and higher marketing expenditure in support of business expansion in the consumer finance company and retail bank, outweighed the rise in revenues from balance sheet growth and improved fee income.

In the US, pre-tax profit declined by 54 per cent to US$1,336 million due to higher loan impairment charges and the effect of lower asset growth, largely driven by HSBC’s planned reduction in mortgage balances in the mortgage services business, discussed more fully below. The rise in loan impairment charges partly reflected asset growth and portfolio seasoning, but was also due to deterioration in sub-prime mortgages originated through the mortgage services channel. The credit quality of second lien and certain portions of first lien loans originated during 2005 and 2006 continued to deteriorate against historical experience, but remained broadly in line with management expectations established at the beginning of the year. The rate of increase in delinquency slowed compared with full year 2006 delinquencies, as management initiatives on collection took effect.

In Canada, profit before tax grew by 18 per cent to US$145 million, reflecting strong asset and deposit growth and a gain on a sale of shares in the Montreal Exchange.

Net interest income grew by 1 per cent to US$6,545 million. In the US, net interest income was marginally higher. Lending balances rose, with notably strong growth in the credit card portfolio. Mortgage balances increased only modestly, as growth in this area was restricted by steps taken to reduce HSBC’s exposure to correspondent mortgages acquired through the mortgage services business. Also, in March 2007 HSBC made the decision to stop purchasing new originations from correspondents. Deposit balances grew too, but liability spreads declined which, together with a narrowing of asset spreads from higher funding costs, largely offset the benefits of balance sheet growth.

Average deposit balances were 25 per cent higher, driven by the continued success of the online savings product. During the first half of 2007, a special promotional rate offer led to 149,000 new account openings and attracted US$4.6 billion of new balances. By 30 June 2007, online savings balances through HSBC Direct had reached US$12.0 billion and customer numbers exceeded 560,000 with US$7.1 billion of new average balances added in the previous 12 months. Growth in Premier, where customer numbers rose by 21 per cent, together with new balances generated from the ongoing branch expansion programme, contributed further to the rise. The financial benefit of higher balances was moderated by the use of competitive pricing to increase customer acquisition, and a change in product mix as customers migrated to higher yielding deposits.

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The slowdown in the US housing market noted in 2006 continued into 2007, evidenced by the deterioration in key indicators such as sales of new and existing homes and levels of house building activity. Average mortgage balances rose by 2 per cent to US$124.4 billion. Average mortgage balances generated through the consumer lending branch network rose by 20 per cent, primarily driven by increased sales of these branch-based products and lower levels of repayments. The US$2.5 billion Champion mortgage portfolio purchased from KeyBank, NA in the final quarter of 2006 also contributed to the rise.

In the mortgage services correspondent business, average balances fell by 4 per cent to US$46.8 billion, reflecting HSBC’s planned strategy to reduce balances in this business. As part of this, HSBC took a decision in March 2007 to stop purchasing new loans from correspondents. In addition, in the first half of 2007, a total of US$2.7 billion of loans which did not include any loans that were 30 days or more delinquent were sold which, along with normal loan repayments, contributed to the decrease in balances.

Prime mortgage balances also continued to fall as HSBC sold down the majority of new loan originations to government-sponsored enterprises and private investors, and elected not to replace portfolios being run-off. Changes in product mix in the mortgage portfolio, reflecting a higher proportion of non-prime mortgages, together with re-pricing initiatives, led to improved yields but, despite this, spreads declined as a result of higher funding costs.

Average credit card balances rose by 13 per cent, partly due to strong organic growth in the core and Metris credit card portfolios from increased marketing. The upgrading and re-launch of the Union Privilege product, growth in the General Motors’ programme and lower levels of repayments in these portfolios contributed further to the increase in balances. Improved yields from repricing and a change in mix to higher levels of non-prime balances offset the impact of higher funding costs, with the subsequent improvement in margins augmenting the benefits of volume growth.

In retail services, average balances rose by 5 per cent, driven by a combination of organic growth and the launch of new co-branded relationships, notably with Best Buy and Saks Fifth Avenue. This benefit compensated for reduced spreads, as a large portion of the book priced at fixed rates was affected by higher funding costs as interest rates rose. Spreads were also reduced by changes in the product mix.

Rising interest rates, higher fuel prices and reductions in the level of incentive programmes offered by car manufacturers led to an almost 5 per cent decline in total industry sales from franchised dealerships. Notwithstanding this, HSBC grew average vehicle loan balances by 6 per cent, mainly from the successful development of the consumer direct channel, as sales generated online and through direct mailings increased by over 50 per cent. The strengthening of relationships with active dealers and higher refinancing volumes, which were driven by improved pricing and increased operational capacity, also contributed to the overall increase. Spreads declined slightly, reflecting changes in product mix from the dealer channel towards near-prime customers and higher funding costs.

Personal non-credit card average loan balances rose by 6 per cent, as a result of targeted direct mail campaigns and higher average loan amounts per customer.

In Canada, net interest income rose by 17 per cent due to lending and deposit growth, partly offset by reduced asset and deposit spreads.

Average deposit balances in Canada grew by 11 per cent, as HSBC continued to improve its high rate savings and direct banking propositions with a new high-yielding online savings account. Together, these successfully generated over US$906 million of incremental balances, of which US$98 million came from new customers to HSBC. The consequent change in product mix, combined with competitive pricing pressures, led to reduced deposit spreads, partly offsetting the benefit of balance growth.

Average lending balances were 15 per cent higher, as strong economic conditions fuelled customer demand for credit assumed through cards and personal loans. A strong Canadian housing market and ongoing branch expansion in consumer finance led to higher mortgage balances. Motor vehicle balances grew from the expansion of the motor finance programme. The greater proportion of secured lending balances and competitive market conditions resulted in a narrowing of asset spreads which partly offset the income benefits from asset growth.

Net fee income grew by 28 per cent to US$2,332 million, largely in the US credit cards and retail services businesses, reflecting volume growth and better cross-selling of enhancement services.

In the US retail bank’s mortgage business, net fee income declined. Although increased volumes of mortgage loans serviced led to higher gross servicing fees, this was more than offset by higher

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H S B C H O L D I N G S P L C

Business Review (continued)

amortisation charges and lower releases of impairment allowances on mortgage servicing rights. In the taxpayer financial services business, a change in contractual terms led to additional payments being made to business partners which resulted in an 8 per cent fall in fee income.

Trading income went from a profit of US$215 million in the first half of 2006 to a loss of US$97 million in the first half of 2007. The 2007 results reflected lower market prices and a decline in market liquidity for wholesale mortgages which affected the Decision One mortgage business. By contrast, the results in 2006 benefited from significantly higher volumes of loans sold in a better market environment. The Decision One trading portfolio at 30 June 2007 has been reduced from the level held at the end of 2006.

The reduction in gains less losses from financial instruments reflected the non-recurrence of the proceeds related to the MasterCard Incorporated IPO. This was partly mitigated by a gain on the sale of shares held in the Montreal Exchange.

Other operating income declined by 26 per cent, primarily from losses arising on asset sales following branch closures in the mortgage services business, along with lower income in the retail services business. This was partly offset by lower incremental losses on the sale of foreclosed assets, reflecting the establishment of substantial reserves in the latter part of 2006, and a gain following the sale and leaseback of a building previously owned by HSBC’s US bank.

Loan impairment charges and other credit risk provisions rose by 78 per cent to US$3,774 million.

In the US, loan impairment charges rose by 80 per cent. This reflected asset growth and portfolio seasoning in the consumer lending and cards businesses, as well as the deterioration noted above in sub-prime mortgages originated within the mortgage services business. Impairment charges in the corresponding period in 2006 were also abnormally low from the effects of changes in bankruptcy legislation. Although 2007 bankruptcy levels were higher than the equivalent period in 2006, filings remained below historical trends.

In the mortgage services business, loan impairment charges increased significantly, driven by higher delinquency and losses, largely as a result of the affected 2005 and 2006 originations

progressing to various stages of delinquency and then to write-off. Although delinquencies rose, this rate of growth slowed during 2007, broadly in line with management expectations. Numerous risk mitigation efforts were implemented relating to the affected components of the mortgage services portfolio. These included enhanced segmentation and analytics in order to identify the higher risk portions of the portfolio and increased levels of collections activity. In the second half of 2006, HSBC slowed growth in this portion of the portfolio by implementing re-pricing initiatives in selected origination segments and tightening underwriting criteria, especially for second lien, stated income, and lower credit scoring segments. In March this year, HSBC announced the decision to discontinue correspondent channel acquisitions in this business. The Decision One mortgage broker business was also restructured in light of significant changes in the wholesale mortgage industry. Loan processing and underwriting functions were centralised and the number of operating centres reduced from 17 to 2. Portions of the mortgage services portfolio are expected to remain under pressure as the 2005 and 2006 originations further progress to various stages of delinquency and ultimately to write-off.

Mortgage services’ loan impairment allowances of US$2.1 billion at 30 June 2007 were consistent with the balance at 31 December 2006 and reflect the best estimate of losses in the portfolio. The balance at 30 June 2007 was broadly in line with the end of 2006, as a significant portion of interest rate resets on first lien adjustable rate mortgages (‘ARMs’), including second lien customers with underlying first lien ARMs, have yet to occur and HSBC remains cautious about losses inherent in this portfolio due to economic factors beyond HSBC’s control. The loan impairment charge for mortgage services was US$760 million in the period, with write-offs net of recoveries of US$680 million.

The consumer lending business also experienced higher loan impairment charges, from balance growth, portfolio seasoning and increased loss severity on second lien loans acquired between 2004 and the third quarter of 2006. A more normalised level of bankruptcy filings after the exceptionally low levels experienced in 2006 also contributed to the increase.

An 84 per cent rise in credit card loan impairment charges resulted from balance growth, an increase in bankruptcies following the abnormally low levels seen in 2006, and changes in the product mix as sub-prime and near-prime balances rose faster than prime loans.

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In Canada, loan impairment charges rose by 25 per cent as a result of balance growth and higher delinquency rates in credit cards and vehicle financing portfolios.

Operating expenses grew by 3 per cent to US$3,783 million. In the US, costs increased by 3 per cent. Staff costs were higher following the recruitment in the consumer finance business to support asset growth and increased collections activity in mortgage services. Employee severance costs grew, partly reflecting the effects of terminating mortgage purchases from correspondents and the restructuring of Decision One. These increases were partly offset by reduced incentive costs, largely attributable to lower originations in mortgage services.

The rise in non-staff costs was mostly due to increased marketing expenditure on growing the core and Metris credit card portfolios, and promoting the co-branded portfolio in retail services. Marketing costs in the retail bank grew from branding initiatives at the John F Kennedy International and La Guardia airports, and expansion of the branch network. Several campaigns to promote online savings, mortgages and card products also contributed to the increase. Other administrative and support expenses rose, fuelled by higher business volumes. Higher costs were also incurred following a rise in the number of foreclosed properties.

Operating expenses increased by 11 per cent in Canada. Staff costs rose due to branch expansion, from ongoing investments in new initiatives and to support revenue growth. Higher marketing costs reflected various promotions, principally relating to the direct savings product and brand awareness campaigns. Other administrative and support costs grew in response to higher levels of transactions, and from the development of a new customer website.

Commercial Banking’s pre-tax profits of US$477 million rose by 3 per cent compared with the first half of 2006. In the US, significant resources were dedicated to expanding various commercial lending businesses and regional offices, which resulted in a rise in loan and deposit balances. The growth of the branch network and consequent rise in staffing levels in 2006, the expansion of the range of loan and deposit products offered to small businesses and mid-market commercial customers, and increased marketing efforts resulted in average commercial loans and deposits being 2 per cent and 20 per cent higher, respectively, in the first six months of 2007 compared with the same period in 2006. HSBC Bank USA launched a ‘Green Campaign’ targeting new customers with a package

of incentives for those switching to online bill payments.

In Canada, profits before tax also rose. Balance sheet growth was strong and credit fees improved.

Net interest income increased by 16 per cent to US$740 million. In the US, the 15 per cent rise was driven by strong growth from small, micro and medium sized business customers. This reflected the continued efforts made by HSBC to further develop its operations through a combination of increased geographical distribution and new products designed to cater for small and medium business customers, supported by the recruitment of additional sales staff and higher levels of marketing activity. The restructuring of the branch sales force dedicated to small and micro business customers also contributed to the rise in net interest income.

Average deposit balances in the US rose by 20 per cent, reflecting geographical expansion, marketing campaigns and a greater emphasis on generating deposits from small and micro business customers. Continued migration to higher yielding products led to a change in product mix, with the subsequent reduction in spreads partly offsetting the income benefits from volume growth.

Lending balances in the US were 2 per cent higher. Geographical expansion continued as 10 new branches were opened which contributed to loan growth from small and micro business customers. A greater focus on attracting higher volumes from mid-market customers, particularly from the new offices opened in recent years, also contributed to the overall increase. The rate of overall balance growth, however, was subdued following a tightening of underwriting standards for certain loans made to small and micro business customers and a slowdown in the commercial real estate market. Lending spreads narrowed, partly offsetting the income benefits from volume growth.

In Canada, net interest income increased by 16 per cent. Average deposit balances rose by 22 per cent, attributable to a combination of higher payments and cash management balances following significant investments made to develop new products, and the acquisition of new customers. There was also an improvement in deposit spreads.

Demand for lending remained strong, reflecting favourable economic conditions as average lending balances rose by 18 per cent. There was particularly robust growth in non-real estate lending as this was promoted ahead of real estate in order to meet regulatory guidelines to limit overall exposure to real

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H S B C H O L D I N G S P L C

Business Review (continued)

estate loans. Lending spreads remained in line with 2006.

In Bermuda, net interest income increased by 24 per cent. Deposit balances declined but this was more than offset by improved liability spreads in a rising interest rate environment. Average lending balances rose by 29 per cent, reflecting strong demand for commercial real estate lending.

Net fee income rose by 1 per cent to US$152 million. In the US, fee income was 6 per cent higher, reflecting geographical and business expansion initiatives which led to increased card and service deposit fees. A rise in the level of foreign exchange transactions resulted in improved fees from mid-market customers. Real estate servicing fees increased, following a new initiative whereby corporate real estate loans originated by HSBC were sold with servicing rights retained to Fannie Mae, a government-sponsored agency. By contrast, commercial mortgage syndication fees declined, due to lower volumes and cyclical market conditions.

In Canada, fee income fell, but this was mainly attributable to the adverse effect of a fair value adjustment on guarantee fees, and a reclassification of fees related to the Canadian Immigrant Investor Programme to the Personal Financial Services segment. Excluding these factors, fee income rose, primarily driven by higher credit fees.

Loan impairment charges of US$46 million were 48 per cent, or US$15 million, higher than in the first half of 2006. In the US, the rise reflected asset growth and a return to a credit environment more in keeping with historical trends. Strong asset growth led to higher impairment charges in Canada, but credit conditions remained favourable in the robust economic climate, consequently charges remained low compared with historical levels. In Bermuda, the increase in impairment charges was due to the non-recurrence of a corporate debt recovery.

Operating expenses increased by 14 per cent to US$443 million. In the US, expenses grew by 20 per cent, as geographical and business expansion led to increased staff and administrative costs. The 3 per cent rise in Canada was attributable to higher staff costs to support growth initiatives, annual pay rises and increased bonus costs from improved revenues.

Income from associates fell, following the non-recurrence of revaluation gains. Excluding this, income from associates rose, driven by an improved performance of HSBC’s private equity investments in Canada.

Corporate, Investment Banking and Markets in North America, reported a pre-tax profit of US$436 million, which represented 10 per cent of the global business’s pre-tax profits, and a rise of 25 per cent compared with the first half of 2006. Total operating income of US$1,197 million was 8 per cent higher than in the first half of 2006. In 2005 and 2006, targeted expansion of the sales and trading operations and various treasury activities resulted in a wider range of product offerings, increased marketing of those products, and an expanded infrastructure to support business growth. As a result of these initiatives, corporate loans, trading assets and deposits in the US increased in the first six months of 2007 compared with the same period in 2006.

The increase in net interest income was driven by lower funding costs and higher net interest income from payments and cash management activities, reflecting the benefit of growing deposit balances. Balance sheet management activities continued to be adversely affected by a rise in short-term interest rates and a flat yield curve.

Net fee income was in line with the first half of 2006. Payments and cash management and securities recorded a 21 per cent increase in transaction fees as higher volumes were generated from a wider range of product offerings and assets under custody grew significantly since the end of 2006.

Net trading income increased by 7 per cent. Derivatives trading revenue from structured products increased by 86 per cent due to a broader product offering in structured credit and emerging market derivatives. Credit and rates activity was adversely affected by widening credit spreads, while the metals business reported a decline as customer volumes decreased against the backdrop of relatively lower precious metals prices. Foreign exchange activities and revenues remained strong throughout 2007, driven by the continued weakening of the US dollar.

The benign corporate credit environment experienced in recent years continued and a small release of impairment allowances was reported.

Operating expenses were broadly in line with the first half of 2006 and some 12 per cent lower than in the second half of the year.

Private Banking reported pre-tax profits of US$60 million, an increase of 54 per cent compared with the first half of 2006. The cost efficiency ratio of 74.2 per cent was 2.8 per cent worse than the comparable prior period. Encouraging growth in revenues was driven by strong increases in net interest income and fees, buoyed by a rise in high net

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worth customers. This was supported by increased referrals from within the wider HSBC group compared with the first half of 2006. Loan impairment charges fell significantly, improving by US$18 million to US$12 million.

Net interest income of US$117 million was 15 per cent higher than in the first half of 2006, driven by strong balance sheet growth, with a slight reduction in spreads. Growth in lending balances was driven by the ‘Tailored Mortgage Solutions’ product, where balances reached US$364 million, while deposit inflows from offshore clients contributed to growth in customer accounts. Overall, average deposit balances rose by 20 per cent and average lending balances increased by 13 per cent.

Demand from clients for HSBC’s discretionary managed products and the ‘Universal Investor’ insurance product, which wraps an investment portfolio and facilitates risk management, contributed to an 18 per cent increase in net fee income, which reached US$140 million.

Client assets grew by 4 per cent to US$45 billion. Very strong demand from clients for the discretionary managed SIS and CIS products saw

the value of balances in the Investment Solutions product range rise by 41 per cent. Client appetite for fund and alternative investment products remained strong.

Loan impairment charges were 60 per cent lower than in the first half of 2006. In both years, charges predominantly related to isolated single credit issues.

Operating expenses were US$207 million, with growth of 20 per cent increasing at a slightly faster rate than operating income. Cost growth was driven by performance-related remuneration, in addition to increased staff numbers, largely client facing, to support the expansion of the business.

Other included fair value movements of US$81 million on HSBC’s own debt in issue and related swaps, which were largely a consequence of a widening of credit spreads. Costs at HSBC Technology USA Inc, which provides technology support to HSBC’s North American subsidiaries, rose by 17 per cent to US$673 million, with recharges reported as ‘Other operating income’ rising by 10 per cent to US$684 million.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data by customer group and global business

Half-year to 30 June 2007

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other

elimination

Total

North America

US$m

Net interest income/(expense)

6,545

740

202

117

(18

)

(279

)

7,307

Net fee income/(expense)

2,332

152

320

140

(40

)

–

2,904

Trading income/(expense) excluding net interest income

(184

)

483

(62

)

–

246

Net interest income on trading activities

–

279

376

Net trading income/(expense)

(97

)

493

(62

)

279

622

Net income from financial instruments designated at fair value

–

Gains less losses from financial investments

–

Dividend income

–

Net earned insurance premiums

231

–

231

Other operating income

114

109

735

(688

)

342

Total operating income

9,169

954

1,197

279

693

(688

)

11,604

Net insurance claims¹

(124

)

–

(124

)

Net operating income before loan impairment charges and other credit risk provisions

9,045

954

1,197

279

693

(688

)

11,480

Loan impairment (charges)/recoveries and other credit risk provisions

(3,774

)

(46

)

(12

)

–

(3,820

)

Net operating income

5,271

908

1,209

267

693

(688

)

7,660

Total operating expenses

(3,783

)

(443

)

(771

)

(207

)

(719

)

688

(5,235

)

Operating profit/(loss)

1,488

465

438

(26

)

–

2,425

Share of profit/(loss) in associates and joint ventures

–

)

–

Profit/(loss) before tax

1,488

477

436

(26

)

–

2,435

Share of HSBC’s profit before tax

10.5

3.4

3.1

0.4

(0.2

)

17.2

Cost efficiency ratio

41.8

46.4

64.4

74.2

103.8

45.6

Balance sheet data²

US$m

Loans and advances to customers (net)

219,735

34,831

21,462

5,267

–

281,295

Total assets

246,117

41,227

223,435

6,386

2,528

519,693

Customer accounts

58,724

33,513

27,661

14,392

107

134,397

Loans and advances to banks (net)³

16,289

Trading assets, financial instruments designated at fair value, and financial investments³

142,088

Deposits by banks³

10,927

For footnotes, see page 62.

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	Half-year to 30 June 2006⁴

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
North America	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/(expense)	6,467		639		162		102		(31	)	(343	)	6,996
Net fee income/(expense)	1,823		150		322		119		(102	)	–		2,312
Trading income/(expense) excluding net interest income	117		4		406		6		(66	)	–		467
Net interest income/(expense) on trading activities	98		–		53		–		(2	)	343		492
Net trading income/(expense)	215		4		459		6		(68	)	343		959
Net income/(expense) from financial instruments designated at fair value	–		–		35		–		(11	)	–		24
Gains less losses from financial investments	20		9		9		3		(1	)	–		40
Dividend income	5		–		33		–		1		–		39
Net earned insurance premiums	237		–		–		–		1		–		238
Other operating income	134		50		83		11		702		(615	)	365

Total operating income	8,901		852		1,103		241		491		(615	)	10,973
Net insurance claims¹	(118	)	–		–		–		1		–		(117	)

Net operating income before loan impairment charges and other credit risk provisions	8,783		852		1,103		241		492		(615	)	10,856
Loan impairment (charges)/recoveries and other credit risk provisions	(2,117	)	(31	)	6		(30	)	–		–		(2,172	)

Net operating income	6,666		821		1,109		211		492		(615	)	8,684
Total operating expenses	(3,649	)	(387	)	(761	)	(173	)	(619	)	615		(4,974	)

Operating profit/(loss)	3,017		434		348		38		(127	)	–		3,710
Share of profit in associates and joint ventures	–		30		1		–		–		–		31

Profit/(loss) before tax	3,017		464		349		38		(127	)	–		3,741


	%		%		%		%		%				%
Share of HSBC’s profit before tax	24.1		3.7		2.8		0.3		(1.0	)			29.9
Cost efficiency ratio	41.5		45.4		69.0		71.8		125.8				45.8

Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	218,291		31,842		13,769		4,968		–				268,870
Total assets	248,176		40,218		199,739		5,836		1,926				495,895
Customer accounts	50,612		29,404		31,475		11,918		97				123,506
Loans and advances to banks (net)³					14,753
Trading assets, financial instruments designated at fair value, and financial investments³					132,744
Deposits by banks³					8,315

For footnotes, see page 62.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data by customer group and global business (continued)

	Half-year to 31 December 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
North America	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/(expense)	6,497		723		104		110		(21	)	(141	)	7,272
Net fee income/(expense) .	1,852		179		334		121		(32	)	–		2,454
Trading income/(expense) excluding net interest income	(51	)	9		340		6		(154	)	–		150
Net interest income/(expense) on trading activities	110		–		19		–		(21	)	141		249
Net trading income/(expense)	59		9		359		6		(175	)	141		399
Net expense from financial instruments designated at fair value	–		–		(46	)	–		(41	)	–		(87	)
Gains less losses from financial investments	(6	)	10		3		6		5		–		18
Dividend income	18		1		28		–		(1	)	–		46
Net earned insurance premiums	255		–		–		–		(1	)	–		254
Other operating income	136		37		186		20		834		(656	)	557

Total operating income	8,811		959		968		263		568		(656	)	10,913
Net insurance claims¹	(141	)	–		–		–		(1	)	–		(142	)

Net operating income⁵	8,670		959		968		263		567		(656	)	10,771
Loan impairment charges and other credit risk provisions	(4,566	)	(43	)	(9	)	(5	)	(1	)	–		(4,624	)

Net operating income	4,104		916		959		258		566		(656	)	6,147
Total operating expenses	(3,730	)	(427	)	(880	)	(182	)	(656	)	656		(5,219	)

Operating profit/(loss)	374		489		79		76		(90	)	–		928
Share of profit/(loss) in associates and joint ventures	–		4		(5	)	–		–		–		(1	)

Profit/(loss) before tax	374		493		74		76		(90	)	–		927


	%		%		%		%		%				%
Share of HSBC’s profit before tax	3.9		5.2		0.8		0.8		(1.0	)			9.7
Cost efficiency ratio	43.0		44.5		90.9		69.2		115.7				48.5

Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	220,517		34,651		17,215		5,604		–				277,987
Total assets	250,985		43,012		208,958		6,558		1,677				511,190
Customer accounts	54,099		31,066		23,711		11,938		108				120,922
Loans and advances to banks (net)³					15,862
Trading assets, financial instruments designated at fair value, and financial investments³					136,141
Deposits by banks³					9,664

1	Net insurance claims incurred and movement in policyholders’ liabilities.
2	Third party only.
3	These assets and liabilities were significant to Corporate, Investment Banking and Markets.
4	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.
5	Net operating income before loan impairment charges and other credit risk provisions.

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Latin America

Profit/(loss) before tax by country within customer groups and global businesses

			Corporate,
	Personal		Investment
	Financial	Commercial	Banking &	Private
	Services	Banking	Markets	Banking		Other		Total
	US$m	US$m	US$m	US$m		US$m		US$m

Half-year to 30 June 2007
Mexico	251	169	50	5		–		475
Brazil	101	116	141	4		(2	)	360
Argentina	10	33	49	–		3		95
Other	26	34	13	1		(4	)	70

	388	352	253	10		(3	)	1,000


Half-year to 30 June 2006¹
Mexico	284	127	105	(1	)	–		515
Brazil	42	82	124	3		–		251
Argentina	23	21	37	–		2		83
Other	5	7	11	1		(8	)	16

	354	237	277	3		(6	)	865


Half-year to 31 December 2006
Mexico	344	70	72	8		–		494
Brazil	79	103	94	3		(4	)	275
Argentina	12	30	31	–		1		74
Other	11	11	1	–		4		27

	446	214	198	11		1		870

Loans and advances to customers (net) by country
	Half-year to

	30 June	30 June		31 December
	2007	2006	¹	2006
	US$m	US$m		US$m

Mexico	16,063	12,043		14,294
Brazil	14,104	9,635		11,469
Argentina	2,026	1,666		1,912
Other	8,413	1,603		8,116

	40,606	24,947		35,791

Customer accounts by country
	Half-year to

	30 June	30 June		31 December
	2007	2006	¹	2006
	US$m	US$m		US$m

Mexico	19,916	18,688		19,775
Brazil	23,660	17,232		19,946
Argentina	2,659	2,103		2,470
Other	9,014	2,054		8,670

	55,249	40,077		50,861

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit before tax

	Half-year to

	30 June		30 June		31 December
	2007		2006¹		2006
Latin America	US$m		US$m		US$m

Net interest income	2,534		2,004		2,193
Net fee income	998		770		860
Net trading income	285		258		279
Net income from financial instruments designated at fair value	157		106		131
Gains less losses from financial investments	98		38		46
Dividend income	6		3		3
Net earned insurance premiums	731		522		554
Other operating income	153		41		50

Total operating income	4,962		3,742		4,116
Net insurance claims incurred and movement in policyholders’ liabilities	(676	)	(489	)	(534	)

Net operating income before loan impairment charges and other credit risk provisions	4,286		3,253		3,582
Loan impairment charges and other credit risk provisions	(775	)	(442	)	(496	)

Net operating income	3,511		2,811		3,086
Total operating expenses	(2,516	)	(1,946	)	(2,220	)

Operating profit	995		865		866
Share of profit in associates and joint ventures	5		–		4

Profit before tax	1,000		865		870


	%		%		%
Share of HSBC’s profit before tax	7.1		6.9		9.1
Cost efficiency ratio	58.7		59.8		62.0
Period-end staff numbers (full-time equivalent)	66,875		55,241		64,900

Balance sheet data²
	US$m		US$m		US$m
Loans and advances to customers (net)	40,606		24,947		35,791
Loans and advances to banks (net)	13,345		9,418		12,634
Trading assets, financial instruments designated at fair value, and financial investments²	22,107		17,171		20,497
Total assets	88,925		58,997		80,771
Deposits by banks	4,727		2,335		5,267
Customer accounts	55,249		40,077		50,861

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.
2	Third party only.

Economic briefing

Economic activity slowed in Mexico during the first quarter of 2007. Annualised GDP growth fell to 2.6 per cent year-on-year, down from an average rate of 4.8 per cent in 2006, mainly from a sharp slowdown in industrial production caused by a fall in US demand for Mexican manufactured goods, especially motor vehicles. Construction activity also reduced and the unemployment rate rose slightly, averaging 3.8 per cent in January-May compared with 3.4 per cent in the same period in 2006. Subsequently, there were signs of a recovery, with industrial surveys and production improving and non-

oil exports rising to 10.8 per cent year-on-year in April, the first double-digit increase since last October. Headline inflation was favoured by abnormally low readings for fruit and vegetable prices during May 2007, when the CPI fell by 0.5 per cent, the sharpest decline recorded in any month since the index began, but inflation throughout the first half of 2007 none the less remained at approximately 4 per cent, above the 3 per cent target. With many potential price increases expected in key variables such as energy, grain and corn, the Bank of Mexico raised interest rates by 25 basis points to 7.25 per cent in April 2007 after eleven months with no change.

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In Brazil, economic activity accelerated in the first half of 2007, with GDP growing by 4.3 per cent year-on-year in the first quarter and industrial production rising by 4.4 per cent year-on-year in the five months ended May 2007. Growth continued to be driven by domestic demand, with private consumption and capital spending rising by 6.0 per cent and 7.2 per cent respectively. The unemployment rate of 9.8 per cent was slightly lower than for the same period in 2006, and consumer price inflation was relatively low at 3.2 per cent year-on-year. As a result of the benign conditions, the Central Bank of Brazil continued to ease monetary policy. Overnight rates fell to 12 per cent in June 2007, down from 13.25 per cent at the end of 2006 and 18 per cent in June 2006. Although the exchange rate appreciated, the trade balance continued to post a substantial surplus of US$20.6 billion in the first half of 2007.

Argentina’s growth slipped to 8 per cent year-on-year in the first quarter of 2007 from an average of 8.5 per cent in 2006. Investment growth slowed, largely reflecting a fall in construction activity. Private spending growth in the first quarter rose slightly to 8.2 per cent, driven by strong job creation, higher real wages and an increase in public spending in an election year. Personal loan demand remained robust, though current growth rates (40 per cent year-on-year) are not expected to be sustained during the rest of 2007. Interest rates stayed low as a consequence of the authorities’ monetary and exchange rate policies, the main objective of which was to prevent the peso from strengthening. Inflation averaged 9.2 per cent in the first half of 2007, though methodological changes mean that this figure is not comparable to the average level of 11.1 per cent reported in 2006. Under the old methodology, inflation would have increased in 2007.

Review of business performance

HSBC’s operations in Latin America reported a pre-tax profit of US$1,000 million compared with US$865 million in the first half of 2006, an increase of 16 per cent. During 2006, HSBC acquired Grupo Banistmo in Central America and Banca Nazionale del Lavoro SpA (‘Banca Nazionale’) in Argentina, complementing existing businesses and expanding HSBC’s geographical presence by 5 new countries. On an underlying basis, pre-tax profits rose by 7 per cent. Commercial Banking reported pre-tax profits which were 49 per cent higher than in the first half of 2006, with notable contributions made by the businesses in Mexico and Brazil, where underlying pre-tax profits rose by 35 per cent and 32 per cent, respectively. Increases in the region were driven by

asset growth and increased fees. An additional four months of profits from Banca Nazionale increased profits in Argentina in both Commercial Banking and Personal Financial Services. In the latter, underlying profit before tax rose compared with the first half of 2006 as the benefit of balance sheet growth and higher fee income was partially offset by the higher costs and loan impairment charges experienced in Mexico. Profit before tax in CIBM decreased, largely as a result of lower balance sheet management income in Mexico.

The following commentary is on an underlying basis.

Personal Financial Services reported a pre-tax profit of US$388 million, a 2 per cent increase on the first half of 2006. Revenues rose, reflecting balance sheet growth, improved fees and an additional four months of Banca Nazionale revenues. A refinement in the income recognition methodology in respect of long-term insurance contracts in Mexico resulted in a one-off revenue increment of US$69 million. Expansion-driven cost growth, together with a related significant rise in loan impairment charges in Mexico, partly mitigated the benefit of increased revenues. The cost efficiency ratio improved 2.6 percentage points as revenues grew faster than costs.

Net interest income rose by 13 per cent to US$1,821 million from asset and liability growth, partly offset by lower deposit spreads.

In Mexico, net interest income rose by 22 per cent from balance sheet growth and improved asset spreads. Average deposit balances rose by 9 per cent. The ‘Tu Cuenta’ bundled product was the key factor behind this growth as balances reached US$1.1 billion at 30 June 2007. HSBC also introduced ‘Cuenta Chicos HSBC’ in a joint venture with the Disney Corporation aimed at the fast developing youth market. The Premier segment performed well, and increased cross-sales led to a rise in the number of products held per customer. Premier deposit balances at 30 June 2007 were US$6.0 billion, helped by an expansion in customer numbers.

Continued investment in HSBC Mexico’s credit cards business resulted in strong sales volumes and average balance growth of 124 per cent. A combination of new customer acquisitions, an effective marketing promotion and portfolio management campaigns to increase usage and improve customer retention, led to higher volumes. These factors, along with attractive balance transfer terms and special introductory rates, helped HSBC improve its market share by 340 basis points. The

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H S B C H O L D I N G S P L C

Business Review (continued)

number of cards in circulation grew by 50 per cent to reach 2.2 million, driven by increased cross-sales and the introduction of a new platinum card.

The mortgage market in Mexico was highly competitive, as demand for housing remained strong. Average mortgage balances rose by 23 per cent, supported by the continued success of the ‘Mortgage Express Approval’ product and improved operational efficiencies. A greater level of sales activity following the introduction of a mobile sales force in the latter part of 2006 also contributed to the increase. Mortgage spreads narrowed in the competitive market. Furthermore, during the first quarter of 2007, a US$227 million residential mortgage portfolio was securitised which, at the time, was the largest transaction of its kind undertaken in Latin America.

There was a significant rise in self-employed and payroll lending balances, fuelled by favourable economic conditions. Average self-employed loan balances rose by 131 per cent, aided by the mobile sales force that reduced time to market, together with increased cross-sales and improved client coverage. Average payroll loan balances grew by 65 per cent, reflecting HSBC’s extensive and well positioned ATM network.

In Brazil, net interest income of US$931 million was 6 per cent higher. A stable inflation rate, the positive economic outlook and falling interest rates led to robust demand for credit. Average lending balances grew by 26 per cent, primarily driven by growth in vehicle financing, pension and payroll loans.

Average motor vehicle balances rose by 45 per cent, and HSBC’s market share improved as the Group strengthened its relationships with dealers, improved its systems and reduced processing times. There was an 83 per cent rise in average balances in the combined pension and payroll loan portfolios, driven by the effects of strong customer demand, acquisitions of payroll accounts and a rise in the average loan size per customer.

A rise in borrowing limits to customers with good credit records led to a 26 per cent increase in average instalment loan balances. Average credit card balances rose by 19 per cent, following steps taken to improve retention, activation and utilisation which, when combined with a new private label and co-branded card launched in conjunction with Visa to capture business from new merchants, led to an 18 per cent increase in the number of cards in force.

In Argentina, net interest income grew by 34 per cent from an extra four months of Banca Nazionale revenues, together with strong asset and

deposit growth, partly offset by reduced deposit spreads. Greater cross-sales activity led to balance growth in cards, vehicle finance and other personal lending. Average deposit balances rose by 24 per cent with the resulting income benefit partly offset by reduced spreads.

Net fee income was 21 per cent higher, principally driven by Mexico and Brazil.

In Mexico, fee income rose by 32 per cent, largely due to higher credit card, ‘Tu Cuenta’ and ATM fees. An increase in card fees reflected HSBC’s strategy of investing in this business, and the consequent growth in both customer numbers and the number of cards in circulation. Fees from the ‘Tu Cuenta’ packaged product rose strongly, following sales of nearly 380,000 new accounts. ATM fees grew from increased transaction volumes, as HSBC continued to expand its already well-positioned network with the addition of 249 new machines.

In Brazil, fee income rose by 4 per cent, primarily due to higher current account fees and improved credit fees. In Argentina, growth reflected increased transactional activity, higher card and vehicle finance balances, and an extra four months of Banca Nazionale revenues.

The insurance operations across the region continued to perform well, as HSBC invested in new products, expanded distribution channels, increased cross-sales and implemented its ‘bancassurance’ model across Central America. The results also benefited from a refinement in the income recognition methodology in respect of long-term insurance contracts in Mexico, which resulted in a one-off revenue increment of US$69 million.

In Mexico, greater cross-sales activity in the branch network led to higher premiums from life insurance and motor vehicle finance products. In Brazil, pension-related premiums rose following marketing campaigns, and the introduction of a life insurance product offered to customers applying for instalment loans proved successful. In Argentina, the increase reflected higher motor and home insurance, life and annuity premiums.

Loan impairment charges rose by 55 per cent, largely following growth in credit expansion in fast growing markets, particularly in Mexico.

In Mexico, significant growth in credit card and self-employed lending balances, areas in which HSBC traditionally had a low market presence, led to an increase in loan impairment charges. Delinquency rates rose during the period as the loan book grew. Loan underwriting criteria and collections strategies are regularly reviewed to maintain the quality of the

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portfolio. Loan impairment charges were also affected by changes made to the consumer portfolio credit models to more accurately represent actual credit behaviour in the underlying portfolios.

Loan impairment charges in Brazil declined in response to tightening of credit approval policies, increased collections activity and growth in secured lending such as vehicle and payroll loans, and consequently, impaired loans as a proportion of total assets declined. In Argentina, growth in lending and the inclusion of the Banca Nazionale portfolio resulted in higher loan impairment charges.

Operating expenses increased by 16 per cent.

In Mexico, the rise was primarily driven by a combination of higher staff numbers and marketing costs incurred to support business expansion. Staff costs grew, following the recruitment of approximately 1,600 additional employees and a higher fiscal base for statutory profit sharing, while marketing costs rose from ‘Tu Cuenta’ and credit card campaigns. Investments made to the branch and the ATM infrastructure led to higher premises and equipment costs. Despite this growth in expenses, the cost efficiency ratio improved by 6.1 percentage points.

In Brazil, expenses grew by 11 per cent. Staff costs increased from one-off expenses incurred to improve future operational efficiencies as HSBC continued to position itself for future growth, and union-agreed pay rises took effect. Non-staff expenses increased as a result of investments in system improvements designed to reduce processing times for vehicle loans, and to further develop the direct sales channels from which 20 per cent of the total Personal Financial Services network business was generated. Marketing and transactional taxes rose in light of the improved revenues, while various payroll account acquisitions and the consequent increase in account holders led to higher amortisation costs.

In Argentina, the 65 per cent rise in expenses was primarily due to the inclusion of an additional four months of Banca Nazionale costs. Staff costs grew due to pay rises and additional headcount to support higher revenues. Marketing and advertising costs rose from various campaigns and the rebranding of Banca Nazionale to HSBC. Investments enabling customers to conduct a wider range of transactions online led to higher IT costs.

Commercial Banking reported pre-tax profits of US$352 million, an increase of 34 per cent over the first half of 2006. Revenues rose from asset growth, increased fees and an additional four months of

Banca Nazionale profits following its acquisition in May 2006. The cost efficiency ratio improved by 110 basis points. Loan impairment charges also fell following reduced charges in Mexico.

Net interest income rose by 16 per cent, driven by asset growth and improved lending spreads, partly offset by declines in liability balances in Mexico.

In Mexico, net interest income rose by 18 per cent to US$235 million, reflecting strong asset growth with higher real estate balances, and a rise in lending balances from small and medium sized business clients.

Average lending balances rose by 36 per cent, primarily reflecting robust demand in the fast growing real estate and residential construction sectors. HSBC improved its capacity to meet the needs of clients involved in residential and tourist construction, improving its presence in this market. The small and medium-sized business portfolios continued to perform well, with balance growth of 148 per cent accompanied by a 24 per cent rise in customer numbers. The International Banking Centre that was opened in Mexico during the latter part of 2006 now supports Central America and Colombia in order to develop greater levels of cross-border business activity for regional and global Commercial Banking customers.

In Brazil, net interest income increased by 11 per cent, mostly due to increased lending to corporate and medium-sized businesses with higher trade balances, and robust demand for receivables-backed loans and agricultural loans. Increased focus on promoting government loans, where HSBC acted as the intermediary, led to growth in loan balances of 101 per cent. In the small and micro business segments, changes to borrowing limits for customers with good credit records led to higher balances. The ‘giro facil’ product performed well, helped by marketing campaigns and the recent introduction of ATM applications. Attractive rates offered in a highly competitive market also contributed to asset growth, but spreads narrowed.

Strong asset and liability growth in Argentina and incremental Banca Nazionale revenues led to an 85 per cent increase in net interest income. Average loan balances rose by 29 per cent from growth in customer numbers, new products and increased marketing. There was particularly strong growth in the leasing and agribusiness portfolios. A greater emphasis on promoting receivable financing in line with HSBC’s global strategy led to an 80 per cent rise in this portfolio. Asset and deposit spreads widened which, combined with deposit growth, contributed further to the increase.

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H S B C H O L D I N G S P L C

Business Review (continued)

Net fee income was 20 per cent higher, primarily driven by robust growth across the region.

In Mexico, fee income grew by 21 per cent. Higher payment and cash management revenues reflected increased customer numbers and greater transaction volumes. New merchant relationship agreements and a rise in the number of point of service terminals led to higher card acquiring fees. Fees from the award winning ‘Estimulo’ product increased by 109 per cent, attributable to higher sales volumes as nearly 4,000 new packages were sold since 30 June 2006. An increased focus on growing structured debt market revenues, and greater cross-sales activity, led to higher trust fees. HSBC’s market share in trade services grew by nearly 4 percentage points as the Group made its geographical presence and enhanced product capabilities felt.

In Brazil, fees rose as re-pricing initiatives triggered higher current account, payment and cash management fees. The latter also benefited from increased transactional activity. Insurance, credit and funds under management fees were also higher. Fee income in Argentina grew, primarily due to incremental Banca Nazionale revenues, increased transaction volumes and re-pricing initiatives.

Loan impairment charges fell by 16 per cent to US$74 million, due to releases in Mexico.

In Mexico, loan impairment charges fell as changes were made to credit models for the commercial loan portfolio to more accurately represent most recent credit behaviour in the underlying portfolios. This was partly offset by higher charges related to the fast growing small and medium business loan books. Loan underwriting criteria and collections strategies are regularly reviewed to maintain the quality of the portfolio.

Loan impairment charges rose by 8 per cent in Brazil from higher charges required in the corporate segment, partly offset by reductions in both the mid-market and the small and micro business segments. In Argentina, higher charges reflected the effect of the Banca Nazionale acquisition.

Operating expenses of US$523 million were 18 per cent higher from continued investments made across the region in developing the Commercial Banking platform.

In Mexico, operating expenses increased by 18 per cent. Staff costs rose, reflecting additional headcount to support business growth and a higher fiscal base for statutory profit sharing. Non-staff costs also increased, attributable to a rise in branch transaction costs from greater business volumes and higher IT costs.

Operating expenses in Brazil grew by 13 per cent. Staff costs grew following the introduction of union-agreed pay rises, and from an increased focus on improving efficiencies in the small and micro business segments, which resulted in one-off costs being incurred. Branch expenses and transactional taxes also increased, reflecting revenue growth. The increase in Argentina reflected union-agreed pay rises, higher marketing and IT costs and an additional four months of Banca Nazionale costs.

Corporate, Investment Banking and Markets in Latin America reported a pre-tax profit of US$253 million, which represented 7 per cent of the global business’s pre-tax profits, and a decrease of 12 per cent compared with the first half of 2006. In Mexico, pre-tax profits declined by 53 per cent, largely due to lower income from balance sheet management. This was partly offset by pre-tax profit increases reported in Argentina and Brazil, although HSBC’s results in Argentina included an additional four months contribution from Banca Nazionale. The cost efficiency ratio deteriorated by 5.8 percentage points.

A decrease in net interest income was primarily driven by the adverse impact of a flat yield curve on balance sheet management activity in Mexico. By contrast, Brazil and Argentina benefited from lower funding costs against the background of a decreasing interest rate environment. An 11 per cent rise in payments and cash management income across the region was due to an increase in transaction volumes and the acquisition of new clients.

Net fee income increased by 15 per cent to US$109 million, mostly driven by higher fees in Brazil. Securities services’ revenue rose as new business volumes and strong local equity markets drove a 56 per cent increase in assets under custody. Investment banking fees also increased.

Income from trading activities was 8 per cent higher than in the first half of 2006. Brazil reported a rise in revenues, mainly due to a successful strategy to provide a wider range of products to HSBC’s customers, while Panama recorded an increase resulting from strong customer volumes. In Mexico, trading revenues continued to be driven by strong gains in foreign exchange, partly offset by lower interest rate derivatives income and a decline in credit and rates revenue as opportunities were constrained by a flat yield curve.

Gains less losses from financial investments increased by 57 per cent, largely due to gains on the disposal of floating rate bonds in Argentina and securities in Brazil and in Mexico.

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Loan impairment releases decreased due to the non-recurrence of a large release in Mexico in 2006.

Operating expenses rose by 21 per cent to US$211 million, in part due to the inclusion of costs related to Banca Nazionale in Argentina. In Mexico, increased costs were largely due to a higher fiscal base for profit sharing. Higher costs in Brazil reflected investments in technology to enhance the corporate lending capabilities.

Increased operational costs resulted from product and distribution expansion initiatives implemented in recent periods, reflecting HSBC’s continued investment in emerging markets.

Private Banking continued to make good progress in the region, with pre-tax profits of US$10 million being more than three times those reported in the first half of 2006. The cost efficiency ratio improved by 17.8 percentage points to 65.5 per cent.

Net interest income grew by 33 per cent, reaching US$8 million, driven by balance sheet growth as the business expanded in the region.

Demand from clients for broking in Mexico and for investment in funds in Brazil resulted in a doubling of net fee income to US$16 million.

Client assets of US$8 billion were 31 per cent higher than at 31 December 2006, following growth in the onshore client base and demand for investment in funds by clients, with over US$600 million of net new money attracted in the first six months of the year.

As the onshore Private Banking business in Latin America expanded, operating expenses increased by 27 per cent to support the growth. This was 34 percentage points lower than the rate of growth of income, which resulted in the improvement in the cost efficiency ratio.

Amounts reported within Other were broadly in line with the first half of 2006.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data by customer group and global business

Half-year to 30 June 2007

Corporate,

Personal

Investment

Inter-

Financial

Commercial

Banking &

Private

segment

Services

Banking

Markets

Banking

Other

elimination

Total

Latin America

US$m

Net interest income

1,821

656

181

(133

)

2,534

Net fee income

636

234

109

–

998

Trading income/(expense) excluding net interest income

)

–

132

Net interest income on trading activities

–

133

153

Net trading income/(expense)

)

133

285

Net income from financial instruments designated at fair value

153

–

157

Gains less losses from financial investments

–

Dividend income

–

Net earned insurance premiums

658

–

731

Other operating income

134

(13

)

153

Total operating income

3,474

966

495

(13

)

4,962

Net insurance claims¹

(626

)

(17

)

(33

)

–

(676

)

Net operating income before loan impairment charges and other credit risk provisions

2,848

949

462

(13

)

4,286

Loan impairment (charges)/ recoveries and other credit risk provisions

(701

)

(74

)

–

)

–

(775

)

Net operating income

2,147

875

464

(13

)

3,511

Total operating expenses

(1,764

)

(523

)

(211

)

(19

)

(12

)

(2,516

)

Operating profit/(loss)

383

352

253

)

–

995

Share of profit in associates and joint ventures

–

Profit/(loss) before tax

388

352

253

)

–

1,000

Share of HSBC’s profit before tax

2.7

2.5

1.8

0.1

–

7.1

Cost efficiency ratio

61.9

55.1

45.7

65.5

109.1

58.7

Balance sheet data²

US$m

Loans and advances to customers (net)

19,529

12,744

8,306

–

40,606

Total assets

32,024

17,520

39,260

88,925

Customer accounts

26,195

14,546

13,778

511

219

55,249

Loans and advances to banks (net)³

10,625

Trading assets, financial instruments designated at fair value, and financial investments³

17,263

Deposits by banks³

2,862

For footnotes, see page 72.

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	Half-year to 30 June 2006⁴

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Latin America	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income/ (expense)	1,455		487		185		6		(2	)	(127	)	2,004
Net fee income	496		179		88		7		–		–		770
Trading income excluding net interest income	25		12		125		1		–		–		163
Net interest income/ (expense) on trading activities	2		3		(37	)	–		–		127		95
Net trading income	27		15		88		1		–		127		258
Net income from financial instruments designated at fair value	101		–		5		–		–		–		106
Gains less losses from financial investments	3		–		35		–		–		–		38
Dividend income	3		–		–		–		–		–		3
Net earned insurance premiums	477		12		33		–		–		–		522
Other operating income	33		5		4		3		5		(9	)	41

Total operating income	2,595		698		438		17		3		(9	)	3,742
Net insurance claims¹	(455	)	(8	)	(25	)	–		(1	)	–		(489	)

Net operating income before loan impairment charges and other credit risk provisions	2,140		690		413		17		2		(9	)	3,253
Loan impairment (charges)/ recoveries and other credit risk provisions	(401	)	(65	)	25		–		(1	)	–		(442	)

Net operating income	1,739		625		438		17		1		(9	)	2,811
Total operating expenses	(1,385	)	(388	)	(161	)	(14	)	(7	)	9		(1,946	)

Operating profit/(loss)	354		237		277		3		(6	)	–		865
Share of profit in associates and joint ventures	–		–		–		–		–		–		–

Profit/(loss) before tax	354		237		277		3		(6	)	–		865


	%		%		%		%		%				%
Share of HSBC’s profit before tax	2.8		1.9		2.2		–		–				6.9
Cost efficiency ratio	64.7		56.2		39.0		82.4		350.0				59.8

Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	10,618		7,403		6,912		14		–				24,947
Total assets	17,812		9,169		31,923		75		18				58,997
Customer accounts	19,337		10,310		10,259		171		–				40,077
Loans and advances to banks (net)³					7,997
Trading assets, financial instruments designated at fair value, and financial investments³					14,075
Deposits by banks³					1,652

For footnotes, see page 72.

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H S B C H O L D I N G S P L C

Business Review (continued)

Profit/(loss) before tax and balance sheet data by customer group and global business (continued)

	Half-year to 31 December 2006

					Corporate,
	Personal				Investment						Inter-
	Financial		Commercial		Banking &		Private				segment
	Services		Banking		Markets		Banking		Other		elimination		Total
Latin America	US$m		US$m		US$m		US$m		US$m		US$m		US$m

Net interest income	1,602		550		140		7		–		(106	)	2,193
Net fee income	557		208		79		16		–		–		860
Trading income excluding net interest income	36		9		93		–		–		–		138
Net interest income on trading activities	12		2		21		–		–		106		141
Trading income	48		11		114		–		–		106		279
Net income/(expense) from financial instruments designated at fair value	126		–		6		–		(1	)	–		131
Gains less losses from financial investments	8		1		37		–		–		–		46
Dividend income	2		1		–		–		–		–		3
Net earned insurance premiums	515		15		26		–		(2	)	–		554
Other operating income	41		2		6		1		9		(9	)	50

Total operating income	2,899		788		408		24		6		(9	)	4,116
Net insurance claims¹	(502	)	(8	)	(26	)	–		2		–		(534	)

Net operating income
before loan impairment charges and other credit risk provisions	2,397		780		382		24		8		(9	)	3,582
Loan impairment (charges)/ recoveries and other credit risk provisions	(363	)	(132	)	1		–		(2	)	–		(496	)

Net operating income	2,034		648		383		24		6		(9	)	3,086
Total operating expenses	(1,592	)	(434	)	(185	)	(13	)	(5	)	9		(2,220	)

Operating profit	442		214		198		11		1		–		866
Share of profit in associates and joint ventures	4		–		–		–		–		–		4

Profit before tax	446		214		198		11		1		–		870


	%		%		%		%		%				%
Share of HSBC’s profit before tax	4.7		2.2		2.1		0.1		–				9.1
Cost efficiency ratio	66.4		55.6		48.4		54.2		62.5				62.0

Balance sheet data²
	US$m		US$m		US$m		US$m		US$m				US$m
Loans and advances to customers (net)	16,165		11,463		8,147		16		–				35,791
Total assets	28,053		16,244		36,333		90		51				80,771
Customer accounts	25,200		13,754		11,685		222		–				50,861
Loans and advances to banks (net)³					9,704
Trading assets, financial instruments designated at fair value, and financial investments³					15,882
Deposits by banks³					3,115


1	Net insurance claim incurred and movement in policyholders’ liabilities.
2	Third party only.
3	These assets and liabilities were significant to Corporate, Investment Banking and Markets.
4	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

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H S B C H O L D I N G S P L C

Financial Review

		Page
Financial summary		74
	Income statement	74
	Net interest income	76
	Net fee income	78
	Net trading income	79
	Net income from financial instruments designated at fair value	80
	Gains less losses from financial investments	81
	Gains arising from dilution of interests in associates	82
	Net earned insurance premiums	82
	Other operating income	83
	Net insurance claims incurred and movement in policyholders’ liabilities	84
	Loan impairment charges and other credit risk provisions	85
	Operating expenses	87
	Share of profit in associates and joint ventures	88
	Asset deployment	89
	Trading assets and financial investments	90
	Funds under management	90
	Assets held in custody and under administration	91
	Economic profit	91

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H S B C H O L D I N G S P L C

Financial Review (continued)

Financial summary

Income statement
	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Interest income	43,567		35,785		40,094
Interest expense	(25,337	)	(19,054	)	(22,339	)
Net interest income	18,230		16,731		17,755
Fee income	12,488		10,441		10,639
Fee expense	(1,993	)	(2,061	)	(1,837	)
Net fee income	10,495		8,380		8,802
Trading income excluding net interest income	3,351		3,112		2,507
Net interest income on trading activities	2,160		1,149		1,454
Net trading income	5,511		4,261		3,961
Net income from financial instruments designated at fair value	874		260		397
Gains less losses from financial investments	999		493		476
Gains arising from dilution of interests in associates	1,076		–		–
Dividend income	252		222		118
Net earned insurance premiums	3,977		2,834		2,834
Other operating income	678		1,153		1,393

Total operating income	42,092		34,334		35,736
Net insurance claims incurred and movement in policyholders’ liabilities	(3,599	)	(2,149	)	(2,555	)

Net operating income before loan impairment charges and other credit risk provisions	38,493		32,185		33,181
Loan impairment charges and other credit risk provisions	(6,346	)	(3,890	)	(6,683	)

Net operating income	32,147		28,295		26,498

Employee compensation and benefits	(10,430	)	(8,992	)	(9,508	)
General and administrative expenses	(7,022	)	(6,065	)	(6,758	)
Depreciation of property, plant and equipment	(817	)	(748	)	(766	)
Amortisation and impairment of intangible assets	(342	)	(334	)	(382	)

Total operating expenses	(18,611	)	(16,139	)	(17,414	)

Operating profit	13,536		12,156		9,084
Share of profit in associates and joint ventures	623		361		485

Profit before tax	14,159		12,517		9,569
Tax expense	(2,645	)	(3,272	)	(1,943	)

Profit for the period	11,514		9,245		7,626

Profit attributable to shareholders of the parent company	10,895		8,729		7,060
Profit attributable to minority interests	619		516		566

The economic backdrop to the 2007 interim results was one of solid growth in developed economies and accelerating growth in emerging markets.
Commodity prices and equity markets remained at high levels, and contributed to a continuing high level of financing and merger activity. The number of IPOs remained high, particularly in Asia. The credit environment was benign across the corporate and commercial sectors, while deterioration in retail portfolios was most evident in the US, where the weak housing market remained the major drag on the US economy.

HSBC made a profit before tax of US$14,159 million, a rise of US$1,642 million, or 13 per cent, compared with the first half of 2006. Excluding dilution gains arising on the Group’s mainland China associates, on an underlying basis profit before tax rose marginally.

Profit growth during the period was overwhelmingly organic and, other than the acquisition of the remaining shares in Erisa in France, there were no significant changes to the constitution of the Group. Integration of previous

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acquisitions progressed satisfactorily in Latin America.

These results were driven by excellent performances across Asia, and in CIBM and Commercial Banking, which offset the effect of higher consumer finance impairment reserves in the US and a challenging environment for the Group’s Personal Financial Services business in Europe.

HSBC’s results benefited from two specific items. First, a gain of US$1 billion was recognised in attributable profit as a result of the dilution of the Group’s holdings in its mainland China associates. Second, the effective tax rate was unusually low at 18.7 per cent in the period.

The following commentary excludes the effect of the dilution gain.

Revenues grew by US$5.2 billion, or 16 per cent, compared with cost growth of US$2.5 billion, or 15 per cent, contributing to an improved cost-efficiency ratio of 49.7 per cent.

Asia drove profit growth, with Hong Kong ahead by 25 per cent and the Rest of Asia-Pacific region by 37 per cent. Latin America and Europe delivered results
ahead of the comparable period in 2006 by 16 per cent and 12.5 per cent, respectively. As expected, North America was lower by 35 per cent as a consequence of higher impairment reserves. It is worth noting that HSBC’s results for the first half of 2006 benefited from exceptionally low loan impairment charges in the US as a result of changes in local bankruptcy law.

At a customer group and global business level, Commercial Banking delivered pre-tax profits which were 20 per cent ahead of the first half of 2006 and CIBM and Private Banking were 32 per cent and 30 per cent ahead, respectively. HSBC’s Personal

Financial Services businesses in Asia also delivered very strong results, with pre-tax profits 38 per cent ahead of the comparable period in 2006. However, overall pre-tax profits within Personal Financial Services declined by 20 per cent compared with the first half of 2006, owing to challenging conditions in the UK and to the weaknesses already highlighted in the Group’s US correspondent mortgage business. The actions taken to restructure and reduce exposure in this business are progressing well. The charge for impairments was lower than in the second half of 2006 and, importantly, was in line with management’s expectations.

Within these results, the Group’s insurance operations made a growing contribution and insurance is seen as a significant growth opportunity for the future.

From a strategic perspective, these results illustrate the value HSBC is creating from its position as the world’s largest and most profitable international emerging markets bank, and from its unique global reach, which allows the Group to act as a bridge between developed and developing markets for its customers.

The strong growth HSBC achieved in operating revenues reflects its focus on seeking out growth markets, and has allowed the Group to continue to invest in organic expansion while maintaining a strong capital position and growing dividends to shareholders.

Average invested capital rose by US$17 billion and the tier one capital ratio remained strong at 9.3 per cent as HSBC pursued expansion around the world. The Group sees this strength as a competitive advantage in light of the current economic environment and the opportunities HSBC sees to deploy capital within its businesses.

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H S B C H O L D I N G S P L C

Financial Review (continued)

Net interest income

	Half-year to

	30 June 2007		30 June 2006		31 December 2006
By geographical region	US$m	%	US$m	%	US$m	%

Europe	3,920	21.5	4,094	24.5	4,195	23.6
Hong Kong	2,568	14.1	2,158	12.9	2,527	14.2
Rest of Asia-Pacific	1,901	10.4	1,479	8.8	1,568	8.8
North America¹	7,307	40.1	6,996	41.8	7,272	41.0
Latin America¹	2,534	13.9	2,004	12.0	2,193	12.4

Net interest income²	18,230	100.0	16,731	100.0	17,755	100.0


	Half-year to

	30 June	30 June	31 December
	2007	2006	2006
	US$m	US$m	US$m

Net interest income²	18,230	16,731	17,755
Average interest-earning assets	1,230,903	1,081,398	1,144,888
Gross interest yield (per cent)³	7.14	6.67	6.95
Net interest spread (per cent)⁴	2.93	3.01	2.87
Net interest margin (per cent)⁵	2.99	3.12	3.08


1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.
2	Net interest income’ comprises interest income less interest expense on financial assets and liabilities which is not recognised as part of ‘Net trading income’ or ‘Net income earned from financial instruments designated at fair value’.
3	Gross interest yield is the average annualised interest rate earned on average interest-earning assets (‘AIEA’).
4	Net interest spread is the difference between the average annualised interest rate earned on AIEA and the average annualised interest rate paid on average interest-bearing funds.
5	Net interest margin is net interest income expressed as an annualised percentage of AIEA.

Net interest income of US$18,230 million was 9 per cent higher than in the first half of 2006, 4 per cent higher on an underlying basis. The commentary below is on an underlying basis.

Movements in net interest income were particularly influenced by the following factors:

•	rising short-term interest rates continued to flatten yield curves in most European markets and in the US, restricting opportunities for Global Markets to generate additional income. This feature was largely mitigated by higher balance sheet management revenues in Hong Kong;

•	interest rate rises in major currencies increased the interest income earned from low-cost deposits and transactional balances, particularly in Personal Financial Services and Commercial Banking. The Group’s payments and cash management businesses also benefited from this effect;

•	HSBC’s reported net interest income includes the funding cost of an increasing proportion of internally funded trading assets, while the related revenue from these is reported in trading income. This is particularly relevant to the UK, France, Hong Kong and the US. The cost of funding net long positions is included within net

	trading income as an interest expense in HSBC’s customer group reporting;

•	spreads were squeezed by market conditions in two respects: lending spreads continued to suffer from strong liquidity and benign credit conditions, and liability spreads narrowed from increased competition for core deposits in certain markets; and

•	HSBC continued to diversify away from credit- related income streams to more competitive deposit products and, in consequence, customer deposits grew at a rate which exceeded the growth in customer loans.

In Europe, net interest income decreased by 15 per cent. The benefit of balance sheet growth and improved deposit spreads in Personal Financial Services and Commercial Banking was substantially offset by the increased deployment of liabilities to fund trading activity, referred to above; there was a corresponding rise in trading income. This was most pronounced in the UK and France.

In UK Personal Financial Services, balance growth was most significant in savings accounts, owing to a continuing focus on attracting savings balances. Interest income from credit cards decreased, and reduced interest income from unsecured loans reflected HSBC’s decision to

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contain growth through stricter underwriting criteria, reflecting its restricted credit appetite. Interest income from mortgages declined as customers sought to fix their monthly payments following the four UK base rate increases between August 2006 and 30 June 2007. In Commercial Banking, strong customer recruitment led to a 9 per cent rise in deposit balances, which helped fund lending growth of 14 per cent. UK balance sheet management revenues declined as the rising trend in short-term interest rates continued to flatten yield curves.

In Hong Kong, net interest income rose by 20 per cent. The benefits from increased lending and deposit balances were augmented by widening deposit spreads as interest rates rose outside Hong Kong, improving income from foreign currency accounts. Growth was strong in Personal Financial Services, with average customer deposits rising by 9 per cent, owing to a competitive pricing strategy and promotional campaigns. Credit card balances increased by 15 per cent, although the associated benefits were partly offset by narrowing mortgage spreads from competitive pressures. Commercial lending and deposit balances grew significantly due to a higher number of customer accounts. Net interest income from CIBM increased significantly as balance sheet management revenues stabilised following a number of periods of decline, and there was strong growth in revenue from deposit products. The increased deployment of these liabilities to fund trading activities, however, reduced reported growth in net interest income, with a corresponding increase in trading income.

In the Rest of Asia-Pacific region, HSBC’s ongoing investment in expanding the branch network and its successful marketing campaigns and promotions resulted in growth in customer numbers and so delivered a 24 per cent rise in net interest income. In Personal Financial Services, increased lending balances were funded by strong deposit growth. Strong regional economies, combined with HSBC’s continued focus on developing cross-border capabilities, supported growth on both sides of the balance sheet in Commercial Banking. Wider liability spreads from rising interest rates augmented

the income benefits of balance sheet growth. Net interest income was further boosted by notable contributions from the payment and cash management businesses in most countries.

In North America, net interest income increased modestly, benefiting from growth in savings, credit card and personal loan portfolios. Mortgage balances increased slightly, primarily from growth in non-prime balances within the branch-based consumer lending business. The benefits from volume growth were largely offset as asset spreads narrowed due to higher funding costs. Also, deposit spreads suffered from competitive pressures and a change in product mix as customers migrated to higher yielding products. Business expansion and higher volumes from micro, small and mid-market customers resulted in growth in both lending and deposit balances in Commercial Banking. The flat US dollar yield curve resulted in lower balance sheet management revenues, though this was more than offset by increased net interest income from payments and cash management activities due to higher customer balances and lower funding costs on short-term securities. The reduced cost of internal funding, a result of decreased trading activity, further benefited net interest income with a corresponding decrease in trading income.

In Latin America, net interest income rose by 12 per cent. A continuing favourable economic climate, combined with increased sales and marketing activity, led to robust growth in lending and deposit balances. In Mexico, average credit card balances rose by 124 per cent due to strong customer acquisition supported by promotional campaigns. The benefits from balance sheet growth and improved asset spreads were partly offset by the adverse effect of a flat yield curve on balance sheet management activity in Mexico. Net interest income in Brazil increased as a positive economic outlook and falling interest rates led to strong demand for credit.

Average interest earning assets of US$1,231 billion were US$150 billion, or 14 per cent, higher than in the first half of 2006 on an underlying basis.

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H S B C H O L D I N G S P L C

Financial Review (continued)

Net fee income

	Half-year to

	30 June 2007		30 June 2006		31 December 2006
By geographical region	US$m	%	US$m	%	US$m	%

Europe	4,144	39.5	3,513	41.9	3,595	40.8
Hong Kong	1,439	13.7	1,000	11.9	1,056	12.0
Rest of Asia-Pacific	1,010	9.6	785	9.4	837	9.5
North America¹	2,904	27.7	2,312	27.6	2,454	27.9
Latin America¹	998	9.5	770	9.2	860	9.8

Net fee income	10,495	100.0	8,380	100.0	8,802	100.0


	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Cards	3,092		2,482		2,885
Account services	1,961		1,688		1,945
Funds under management	1,390		1,571		1,147
Broking income	928		728		626
Insurance	804		693		665
Credit facilities	672		462		460
Global custody	557		423		374
Unit trusts	420		265		255
Imports/exports	407		383		397
Remittances	273		223		249
Corporate finance	220		95		160
Underwriting	196		150		136
Trust income	146		113		135
Maintenance income on operating leases	69		59		63
Mortgage servicing	53		47		50
Other	1,300		1,059		1,092

Total fee income	12,488		10,441		10,639

Less: fee expense	(1,993	)	(2,061	)	(1,837	)

Net fee income	10,495		8,380		8,802


1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

Net fee income rose by 25 per cent to US$10,495 million, compared with US$8,380 million in the first half of 2006. On an underlying basis, net fee income rose by 21 per cent. The principal drivers of this growth were as follows:

•

broking income, global custody fees and unit trust fees rose as a result of strong equity markets, particularly in Hong Kong, the UK, Germany, South Korea and India. Additional performance fees were earned on emerging markets funds. In Hong Kong, an emphasis on wealth management products and fees from cash management and remittances coincided with increased activity in both equity and currency markets and a rise in trade flows. Investment banking opportunities arose in Asia from the large number of IPOs, and in Europe from increased market activity, particularly in the UK and France;

•	increased personal credit card transaction volumes and balances led to a 14 per cent increase in card fee income, predominantly in the US, but also in Mexico, Turkey and the Middle East. In the US retail services business, customer account balances were maintained at high levels, which generated additional fee income from payments. The bundling of cards with other products, such as ‘Tu Cuenta’ in Mexico, and acquisition campaigns contributed to the increased number of cards issued and resulted in higher balances;

•	insurance sales improved on the back of strong demand in the US and improved distribution capabilities in Asia and Latin America;

•	account service fees and credit services fees grew by 44 per cent in the US and by 21 per cent in Latin America. Transaction volumes and customer numbers increased, while revised pricing structures proved beneficial to growth in

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net fee income. In the UK, fees related to credit facilities increased; and

•	credit-related fees grew strongly in CIBM from successful implementation of its emerging markets-led, financing-focused strategy.

Net trading income

	Half-year to

	30 June 2007		30 June2006		31 December 2006
By geographical region	US$m	%	US$m	%	US$m	%

Europe	3,338	60.5	2,187	51.4	2,342	59.1
Hong Kong	469	8.5	306	7.2	311	7.9
Rest of Asia-Pacific	797	14.5	551	12.9	630	15.9
North America¹	622	11.3	959	22.5	399	10.1
Latin America¹	285	5.2	258	6.0	279	7.0

Net trading income	5,511	100.0	4,261	100.0	3,961	100.0


	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Trading activities	3,266		3,055		2,410
Net interest income on trading activities	2,160		1,149		1,454
Other trading income Hedge ineffectiveness:
– on cash flow hedges	(49	)	(46	)	(76	)
– on fair value hedges	21		(11	)	27
Non-qualifying hedges	113		114		146

Net trading income	5,511		4,261		3,961


1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

Net trading income increased by 29 per cent, reflecting continued business growth, favourable market conditions, and the investments made in extending Global Markets’ product range and enhancing its sales and execution capabilities. The cost of internal funding on long positions is excluded from the reported ‘Net trading income’ line and included in ‘Net interest income’. However, this cost is reinstated in ‘Net trading income’ in HSBC’s customer group and global business reporting.

Income from structured derivatives grew by 53 per cent, as recent investments in technical expertise and systems enabled HSBC to address a broader spectrum of client needs. Advantage was taken of volatile market conditions to grow net trading income and structured equity and structured credit derivatives’ volumes grew as a result of increased transactions with clients.

Record foreign exchange income was reported in the first half of 2007, with strong results in Hong

Kong, Rest of Asia-Pacific and Latin America. In aggregate, foreign exchange income in Asia and Latin America increased by 25 per cent, reflecting the benefits of CIBM’s focus on emerging markets and improved leverage from HSBC’s strong and diversified distribution network.

Within the credit and rates business, trading income declined as performance was negatively affected by conditions in the sub-prime mortgage market, which resulted in the widening of credit spreads.

Equities income grew by 52 per cent, with record results achieved in the period. Trading income growth was underpinned by the strength of major stock indices, with further growth driven by equity financing and equity derivatives. In France, the business benefited from a gain of US$93 million from the sale of an investment in Euronext N.V. shares.

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H S B C H O L D I N G S P L C

Financial Review (continued)

Net income from financial instruments designated at fair value

	Half-year to		At
	30 June 2007		30 June 2007

	Net income		Assets	Liabilities
	US$m	%	US$m	US$m
By geographical region
Europe	348	39.8	24,936	36,749
Hong Kong	210	24.0	5,507	4,393
Rest of Asia-Pacific	78	8.9	1,836	480
North America¹	81	9.3	–	34,344
Latin America¹	157	18.0	2,570	–

	874	100.0	34,849	75,966

	Half-year to				At
	30 June 2006				30 June 2006

	Net income/(expense)				Assets	Liabilities
	US$m		%		US$m	US$m
By geographical region
Europe	129		49.6		10,561	28,649
Hong Kong	6		2.3		4,000	4,067
Rest of Asia-Pacific	(5	)	(1.9	)	854	307
North America¹	24		9.2		–	31,143
Latin America¹	106		40.8		1,440	188

	260		100.0		16,855	64,354

	Half-year to				At
	31 December 2006				31 December 2006

	Net income/(expense)				Assets	Liabilities
	US$m		%		US$m	US$m
By geographical region
Europe	15		3.8		12,164	32,630
Hong Kong	254		64.0		4,745	4,291
Rest of Asia-Pacific	84		21.2		1,729	410
North America	(87	)	(22.0	)	–	32,880
Latin America	131		33.0		1,935	–

	397		100.0		20,573	70,211

			Half-year to

			30 June		30 June		31 December
			2007		2006		2006
			US$m		US$m		US$m

Income from assets held to meet liabilities under insurance and investment contracts			1,348		318		1,234
Change in fair value of liabilities to customers under investment contracts			(620	)	(226	)	(782	)
Movement in fair value of HSBC’s long-term debt issued and related derivatives			284		135		(170	)
	–	change in own credit spread on long-term debt	172		(172	)	(216	)
	–	other changes in fair value	112		307		46

Income/(expense) from other instruments designated at fair value			(138	)	33		115

Net income from financial instruments designated at fair value			874		260		397

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

HSBC has principally used the fair value designation in the following instances:

•	for certain fixed-rate long-term debt issues whose interest rate characteristic has been changed to floating through interest rate swaps as part of a documented interest rate

management strategy. Approximately US$61 billion of the Group’s debt issues have been accounted for using the fair value option. The movement in fair value of these debt issues includes the effect of own credit spread changes and any ineffectiveness in the economic relationship between the related swaps and own

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	debt. As credit spreads narrow, accounting losses are booked, and the reverse is true in the event of spreads widening. Ineffectiveness arises from the different credit characteristics of the swap and own debt coupled with the sensitivity of the floating leg of the swap to changes in short-term interest rates. The size and direction of the accounting consequences of changes in own credit spread and ineffectiveness can be volatile from period to period, but do not alter the cash flows envisaged as part of the documented interest rate management strategy;

•	for certain financial assets held by insurance operations and managed at fair value to meet liabilities under insurance contracts (approximately US$7 billion of assets); and

•	for financial liabilities under investment contracts and the related financial assets, when the change in value of the assets is correlated with the change in value of the liabilities to policyholders (approximately US$18 billion of assets and related liabilities).

Net income from assets designated at fair value and held to meet liabilities under insurance and investment contracts is correlated with changes in liabilities under the related investment and insurance contracts. Liabilities under investment contracts are generally measured at fair value and changes are taken to ‘Net income from financial instruments designated at fair value’ to match the net income on

the related assets. There is, however, a mismatch in presentation for insurance contracts where the change in the value of the insurance contract liabilities is included within ‘Net insurance claims incurred and movement in policyholders’ liabilities’, whereas any related asset returns are included within ‘Net income from financial instruments designated at fair value’.

The commentary that follows is on an underlying basis.

Net income from financial instruments designated at fair value increased by 112 per cent compared with the first half of 2006. Income from assets held to meet liabilities under insurance and investment contracts rose by 201 per cent, mostly from higher investment returns in equity portfolios held by insurance companies in the UK and Hong Kong. The change in fair value of liabilities under investment contracts increased by 159 per cent compared with the first half of 2006, reflecting the attribution to customers of the majority of the gain on investment contract assets.

The remainder of the increase reflected a widening of credit spreads on certain fixed-rate long-term debt issued by HSBC Finance and higher net mark-to-market movements on this debt, partly offset by mark-to-market losses on the related interest rate swaps. This gain reversed losses taken in prior periods and, over the life of this debt, these fair value adjustments will fully reverse.

Gains less losses from financial investments

	Half-year to

	30 June 2007		30 June 2006		31 December 2006

	US$m	%	US$m	%	US$m	%
By geographical region
Europe	790	79.1	266	54.0	358	75.2
Hong Kong	32	3.2	122	24.7	40	8.4
Rest of Asia-Pacific	26	2.6	27	5.5	14	2.9
North America¹	53	5.3	40	8.1	18	3.8
Latin America¹	98	9.8	38	7.7	46	9.7

Gains less losses from financial investments	999	100.0	493	100.0	476	100.0


			Half-year to

			30 June	30 June	31 December
			2007	2006	2006
			US$m	US$m	US$m
Net gains from disposal of:
	–	debt securities	133	154	98
	–	equity securities	852	338	364
	–	other financial investments	14	1	14

Gains less losses from financial investments			999	493	476

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

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H S B C H O L D I N G S P L C

Financial Review (continued)

HSBC reported net gains of US$999 million from the disposal of available-for-sale financial investments during the first half of 2007, 103 per cent higher than in the first half of 2006. Gains from financial instruments were primarily attributable to the gain on the sale of shareholdings and the successful realisation of a number of private equity investments in both the UK and France. In Latin America, a gain arose from the sale of Serasa, a credit bureau.

In the first half of 2006, HSBC benefited from a US$93 million gain arising from the partial redemption of HSBC’s investment in MasterCard Incorporated following its IPO and a gain of US$101 million on the sale of part of HSBC’s stake in UTI Bank Limited, which did not recur in 2007.

Gains arising from dilution of interests in associates

Three of HSBC’s associates, Industrial Bank, Ping An Insurance and Bank of Communications, issued new shares for which HSBC did not subscribe. As a consequence of the new monies raised by the associates, HSBC’s share of their underlying assets increased by US$1,076 million, notwithstanding the reduction in the Group’s interests. These gains are presented in the income statement as ‘Gains from dilution of the Group’s interests in associates’, and should be regarded as exceptional. For further details see Note 19 on the Financial Statements.

Net earned insurance premiums

	Half-year to

	30 June 2007		30 June 2006		31 December 2006

	US$m	%	US$m	%	US$m	%
By geographical region
Europe	1,480	37.2	668	23.6	630	22.2
Hong Kong	1,426	35.9	1,317	46.5	1,311	46.3
Rest of Asia-Pacific	109	2.7	89	3.1	85	3.0
North America¹	231	5.8	238	8.4	254	9.0
Latin America¹	731	18.4	522	18.4	554	19.5

Net earned insurance premiums	3,977	100.0	2,834	100.0	2,834	100.0

	Half-year to

	30 June		30 June		31 December
	2007		2006		2006
	US$m		US$m		US$m

Gross insurance premium income	4,532		3,262		3,193
Reinsurance premiums	(555	)	(428	)	(359	)

Net earned insurance premiums	3,977		2,834		2,834

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

Net earned insurance premiums of US$3,977 million were US$1,143 million, or 40 per cent, higher than in the first half of 2006. During the year, HSBC acquired the remaining shares in Erisa in France. Net earned insurance premiums increased by 10 per cent on an underlying basis.

The commentary that follows is on an underlying basis.

In Europe, net earned insurance premiums increased by 1 per cent to US$1,480 million. Increased premium income from pension fund products in the UK was largely offset by the adverse effect on premiums of HSBC having ceased underwriting certain life insurance products.

In Hong Kong, net earned insurance premiums of US$1,426 million were 9 per cent higher than in the first half of 2006. Improved premium income from the life business was primarily attributable to an increase in new business, driven by the launch of investment linked insurance products for personal and commercial clients and new propositions designed to meet customers’ financial retirement needs.

In the Rest of Asia-Pacific region, net earned insurance premiums were 16 per cent higher than in the first half of 2006. The development of new insurance product initiatives, including a recently launched medical insurance product in Singapore, shariah-compliant insurance propositions in the Middle East and the establishment of a Takaful joint

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venture in Malaysia, underlined HSBC’s continued emphasis on expanding insurance business across the region.

In North America, premium income stayed broadly in line with the first half of 2006.

In Latin America, net earned insurance premiums increased by 28 per cent. In Brazil, pension sales increased and higher personal loan sales resulted in a significant rise in new life business volumes due to life contracts being offered to customers as a complementary product.

Other operating income

	Half-year to

	30 June 2007			30 June 2006			31 December 2006

	US$m		%	US$m		%	US$m		%
By geographical region
Europe	262		17.1	633		35.8	795		35.0
Hong Kong	413		27.0	443		25.0	391		17.2
Rest of Asia-Pacific	360		23.5	288		16.3	477		21.0
North America¹	342		22.4	365		20.6	557		24.6
Latin America¹	153		10.0	41		2.3	50		2.2

	1,530		100.0	1,770		100.0	2,270		100.0

Intra-HSBC elimination	(852	)		(617	)		(877	)

Other operating income	678			1,153			1,393

	Half-year to

	30 June		30 June	31 December
	2007		2006	2006
	US$m		US$m	US$m

Rent received	315		340	347
Gain/(loss) on disposal of assets held for resale	(37	)	79	(51	)
Valuation gains on investment properties	48		80	84
Gain on disposal of property, plant and equipment, and non-financial investments	152		180	601
Change in present value of in-force long-term insurance business	(155	)	57	(17	)
Other	355		417	429

Other operating income	678		1,153	1,393

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

Other operating income of US$678 million was US$475 million, or 41 per cent, lower than in the first half of 2006, a 49 per cent decline on an underlying basis.

The commentary that follows is on an underlying basis.

In Europe, a 68 per cent decline in other operating income arose due to a fall in the present value of in-force long-term business in the UK which followed a change in FSA regulations. This was more than offset by a reduction in provisions reported in ‘Net insurance claims incurred and movements in policyholders’ liabilities’. The non-recurrence of the profit realised on the sale of HSBC’s stake in The Cyprus Popular Bank contributed further to the decrease.

In Hong Kong, the reduction in other operating income was partly due to the disposal of Hang Seng Bank Limited’s former head office building in 2006.

Other operating income in Rest of Asia-Pacific rose by 20 per cent, mostly due to increased levels of activity at the Group Service Centres in India.

In North America, the reduction reflected losses on asset sales following branch closures in the mortgage services business. Income in the retail services business also declined, but these effects were partly mitigated by lower losses on the sale of foreclosed assets, and a gain following a sale and leaseback transaction of a building formerly owned by HSBC’s US bank.

In Latin America, the rise in other operating income was mostly driven by a refinement of the income recognition methodology in respect of long-term insurance contracts in Mexico. A gain on a credit card portfolio sale in Brazil contributed further to the increase.

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H S B C H O L D I N G S P L C

Financial Review (continued)

Net insurance claims incurred and movement in policyholders’ liabilities

	Half-year to

	30 June 2007		30 June 2006		31 December 2006

	US$m	%	US$m	%	US$m	%
By geographical region
Europe	1,146	31.8	287	13.4	244	9.5
Hong Kong	1,512	42.1	1,193	55.5	1,506	58.9
Rest of Asia-Pacific	141	3.9	63	2.9	129	5.0
North America¹	124	3.4	117	5.4	142	5.6
Latin America¹	676	18.8	489	22.8	534	21.0

Net insurance claims incurred and movement in policyholders’ liabilities	3,599	100.0	2,149	100.0	2,555	100.0


	Half-year to

	30 June	30 June		31 December
	2007	2006		2006
	US$m	US$m		US$m

Gross insurance claims and movement in policyholders’ liabilities	3,428	2,270		2,802
Reinsurers’ share of claims incurred and movement in policyholders’ liabilities	171	(121	)	(247	)

Net insurance claims incurred and movement in policyholders’ liabilities	3,599	2,149		2,555

1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

Net insurance claims incurred and movement in policyholders’ liabilities of US$3,599 million were 67 per cent higher than in the first half of 2006. During the year, HSBC acquired the remaining shares in Erisa in France. Net insurance claims incurred and movement in policyholders’ liabilities increased by 13 per cent on an underlying basis.

Net insurance claims incurred and movement in policyholders’ liabilities arise from both life and non-life insurance business. For non-life business, amounts reported represent the cost of claims paid during the year and the estimated cost of notified claims. For life business, the main element of claims is the liability to policyholders created on the initial underwriting of the policy and any subsequent movement in the liability that arises, primarily from the attribution of investment performance to savings-related policies. Consequently, claims rise in line with increases in sales of savings-related business and with investment market growth.

The commentary that follows is on an underlying basis.

In Europe, net insurance claims incurred and movement in policyholders’ liabilities decreased by 91 per cent, primarily driven by a reduction in the present value of the in-force insurance business, reflecting a change in FSA rules. This was partly offset by a decrease in other operating income.

In Hong Kong, the 28 per cent increase largely reflected higher life insurance premiums in line with business growth.

In Rest of Asia-Pacific, a 110 per cent increase was mainly the result of strong demand for insurance products in Singapore and the launch of HSBC Amanah Takaful in 2006.

In North America, net insurance claims incurred and movement in policyholders’ liabilities were broadly in line with the first half of 2006.

In Latin America, higher sales of life and pension fund products, primarily driven by the success of a sales campaign during the first quarter of 2007, led to an increase in net insurance claims.

Loan impairment charges and other credit risk provisions rose by 63 per cent compared with the first half of 2006, to US$6,346 million. On an underlying basis, charges increased by 57 per cent. The following factors drove the underlying increase:

•	Personal Financial Services, which accounted for the majority of the customer loan portfolio, contributed 91 per cent of the increase. The vast majority of this increase was in North America. Outside North America, the rise in impairment charges reflected portfolio growth and seasoning;

•	in assessing the period-on-period increase in loan impairment charges in North America, the following background perspective is important.

	The loan impairment charge in the first half of 2006 benefited from:

	–	exceptionally low levels of personal bankruptcy filings in the US, as a result of a new bankruptcy law which took effect in October 2005;

	–	the effect of significant loan growth in 2004 and 2005, which had not yet fully seasoned; and

	–	a generally favourable credit environment in the US which affected the comparability of loan impairment charges between periods.

	The increased loan impairment charge in the first half of 2007 reflected higher levels of receivables, higher levels of delinquency driven by normal portfolio seasoning, increased levels of personal bankruptcy filings and the progression of portions of HSBC Finance’s mortgage services portfolio purchased in 2005 and 2006 into various stages of delinquency and charge-off;

•	in Latin America, a 52 per cent increase in loan impairment charges reflected the rate of underlying growth in lending across the region;

•	increased loan impairment charges in the UK arose from a refinement of the roll rate methodology in the consumer finance business and upward market trends in personal bankruptcies and IVAs; and

•	the commercial and corporate credit environment in all regions remained largely benign.


1	In 2006, Mexico and Panama were reclassified from the North America segment to the Latin America segment. Comparative information has been restated accordingly.

2	In the first half of 2006, a charge of US$135 million was recognised arising from the waiver of the TSR-related performance condition in respect of the 2003 awards under the HSBC Holdings Group Share Option Plan (‘the Plan’). As explained in the Annual Report and Accounts 2005, in light of the impressive and sustained performance and shareholder returns over the three years covered by the 2003 awards, the Group Remuneration Committee exercised its discretion, as permitted within the Plan, to waive the TSR performance condition. Under both IFRSs and US GAAP this is treated as a modification which requires an additional accounting charge: this is a non-cash item.

	•	administrative expenses increased as a result of marketing and IT expenditure to enhance brand awareness, support sales activities and promote direct banking capabilities across all regions. The emphasis on direct channels resulted in a significant increase in internet-based transactions, contributing to efficiencies that mitigated the increased cost of processing higher volumes; and

	•	various initiatives undertaken to support business expansion continued to augment infrastructure costs. In the UK, major costs were incurred to refurbish the branch network, improve and increase the number of self-service

		machines and extend opening hours in certain branches. In the US, Mexico, Turkey and parts of the Asia-Pacific region, higher costs reflected the expansion of the retail business through branch openings and expansion of ATM networks and further development of the commercial banking operations.

	Cost efficiency ratios

	HSBC’s cost efficiency ratio improved from 50 per cent to 48 per cent. Significant productivity

1	Expressed as a percentage of average invested capital.
2	Average invested capital is measured as average total shareholders’ equity after adding back goodwill previously written-off directly to reserves, deducting average preference shares issued by HSBC Holdings and deducting average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities. This measure reflects capital initially invested and subsequent profit.
3	Return on invested capital is based on the profit attributable to ordinary shareholders of the parent company.

	Page
Risk management	93
Credit risk management	93
Credit exposure	93
Credit quality	105
Impairment allowances and charges	107
Risk elements in the loan portfolio	111
Liquidity and funding management	113
Ratio of net liquid assets to customer liabilities	113
Market risk management	113
Value at risk	114
Fair value and price verification control	115
Trading portfolios	115
Non-trading portfolios	117
Sensitivity of net interest income	117
Structural foreign exchange exposures	119
Operational risk management	119
Legal risk management	119
Reputational risk management	120
Risk management of insurance operations	120
Balance sheet of insurance operations by type of contract	122
Capital management and allocation	125
Capital management	125
Capital measurement and allocation	125
Basel II	126
Risk-weighted assets by principal subsidiary	128

	At	Constant	Movement on		At
	31 December	currency	a constant		30 June
	2006	effect	currency basis		2007
	US$m	US$m	US$m		US$m

Loans and advances to customers
Personal:
Residential mortgages¹	265,337	3,816	(2,329	)	266,824
Other personal²	210,809	2,750	8,493		222,052

Total personal	476,146	6,566	6,164		488,876

Corporate and commercial:
Commercial, industrial and international trade	162,109	3,579	10,663		176,351
Commercial real estate	60,366	1,327	2,645		64,338
Other property-related	27,165	658	1,050		28,873
Government	8,990	69	(1,495	)	7,564
Other commercial³	84,477	1,827	4,801		91,105

Total corporate and commercial	343,107	7,460	17,664		368,231

Financial:
Non-bank financial institutions	59,204	1,041	21,124		81,369
Settlement accounts	3,254	29	665		3,948

Total financial	62,458	1,070	21,789		85,317

Total gross loans and advances to customers	881,711	15,096	45,617		942,424
Loans and advances to banks	185,212	2,906	26,534		214,652

Total gross loans and advances	1,066,923	18,002	72,151		1,157,076

1	Including Hong Kong Government Home Ownership Scheme loans of US$3,972 million at 30 June 2007.
2	Including second lien mortgages and other property-related lending.
3	Including advances in respect of agriculture, transport, energy and utilities.

1	Including Hong Kong Government Home Ownership Scheme loans of US$3,972 million.
2	Including advances in respect of agriculture, transport, energy and utilities.
3	Including credit card lending of US$76,211 million.
4	Includes loans individually assessed as impaired and collectively assessed loans with a high likelihood of default. Impairment allowances establish a best estimate of loss arising on both these categories of loans and on the remaining book of collectively assessed loans.
5	Including collective impairment allowances on collectively assessed loans and advances.

	At 30 June 2006 (restated¹)

													Gross loans
											Gross		by industry
					Rest of						loans and		sector as a
			Hong		Asia-		North		Latin		advances to		% of total
	Europe		Kong		Pacific		America		America		customers		gross loans
	US$m		US$m		US$m		US$m		US$m		US$m		%
Personal
Residential mortgages²	83,401		28,939		18,536		122,555		2,199		255,630		30.9
Other personal	60,359		9,644		11,878		102,082		8,449		192,412		23.3

	143,760		38,583		30,414		224,637		10,648		448,042		54.2

Corporate and commercial
Commercial, industrial and international trade	91,702		17,841		23,330		10,583		6,739		150,195		18.2
Commercial real estate	24,838		13,313		5,414		13,152		419		57,136		6.9
Other property-related	8,583		6,151		3,112		5,481		729		24,056		2.9
Government	1,702		418		1,846		202		3,755		7,923		1.0
Other commercial³	50,429		6,349		8,593		8,805		2,418		76,594		9.3

	177,254		44,072		42,295		38,223		14,060		315,904		38.3

Financial
Non-bank financial institutions	36,933		2,493		2,436		10,280		1,407		53,549		6.5
Settlement accounts	4,965		1,397		604		980		149		8,095		1.0

	41,898		3,890		3,040		11,260		1,556		61,644		7.5

Total gross loans and advances to customers⁴	362,912		86,545		75,749		274,120		26,264		825,590		100.0

Percentage of Group loans and advances by geographical region	43.9	%	10.5	%	9.2	%	33.2	%	3.2	%	100.0	%
Impaired loans	5,767		504		1,041		3,638		1,346		12,296
Impaired loans as a percentage of gross loans and advances to customers	1.6	%	0.6	%	1.4	%	1.3	%	5.1	%	1.5	%
Impairment allowances outstanding against loans and advances⁵	3,513		391		910		5,249		1,318		11,381
Impairment allowances outstanding as a percentage of impaired loans⁵	60.9	%	77.6	%	87.4	%	144.3	%	97.9	%	92.6	%

1	Including Hong Kong Government Home Ownership Scheme loans of US$4,078 million.
2	Including advances in respect of agriculture, transport, energy and utilities.
3	Including credit card lending of US$74,518 million.
4	Including collective impairment allowances on collectively assessed loans and advances.

	At 30 June 2006 (restated¹)

				Commercial,
				international
	Residential	Other	Property-	trade and
	mortgages	personal	related	other	Total
	US$m	US$m	US$m	US$m	US$m

Australia	4,714	442	1,647	3,033	9,836
India	1,219	734	196	2,040	4,189
Indonesia	15	361	2	1,007	1,385
Japan	15	148	719	2,715	3,597
Mainland China	372	12	1,166	3,986	5,536
Malaysia	2,357	1,050	526	3,326	7,259
Middle East (excluding Saudi Arabia)	301	2,619	1,542	10,373	14,835
Egypt	–	107	42	859	1,008
United Arab Emirates	216	1,591	1,270	6,438	9,515
Other Middle East	85	921	230	3,076	4,312
Singapore	3,137	3,340	1,460	2,217	10,154
South Korea	2,673	681	17	2,263	5,634
Taiwan	2,241	1,014	17	851	4,123
Other	1,492	1,477	1,234	4,998	9,201

Total of Rest of Asia-Pacific	18,536	11,878	8,526	36,809	75,749


Argentina	68	187	42	1,473	1,770
Brazil	200	5,494	242	4,485	10,421
Mexico	1,458	2,602	640	7,748	12,448
Other	473	166	224	762	1,625

Total of Latin America	2,199	8,449	1,148	14,468	26,264

	At 30 June 2007				At 30 June 2006				At 31 December 2006⁴

	HSBC				HSBC				HSBC
	Finance	¹	Other	Total	Finance	¹	Other	Total	Finance	¹	Other	Total
	US$m		US$m	US$m	US$m		US$m	US$m	US$m		US$m	US$m

Total mortgage lending²	94,306		194,221	288,527	95,895		182,290	278,185	99,150		189,348	288,498

Interest only (including endowment) mortgages	–		34,735	34,735	–		30,773	30,773	–		33,190	33,190
Affordability mortgages, including ARMs	21,876		62,077	83,953	30,943		58,766	89,709	30,169		60,106	90,275
Other	–		415	415	–		406	406	–		295	295

Total interest only and affordability lending	21,876		97,227	119,103	30,943		89,945	120,888	30,169		93,591	123,760

As a percentage of total mortgage lending	23.2%		50.1%	41.3%	32.3%		49.3%	43.5%	30.4%		49.4%	42.9%
Second lien mortgages	17,911		4,843	22,754	19,626		4,873	24,499	19,420		4,938	24,358

As a percentage of total mortgage lending	19.0%		2.5%	7.9%	20.5%		2.7%	8.8%	19.6%		2.6%	8.4%
Negative equity²	12,535		1,418	13,953	13,622		2,239	15,861	12,347		2,450	14,797
Other loan to value ratios greater than 90 per cent³	40,471		16,789	57,260	41,167		17,160	58,327	45,712		19,608	65,320

	53,006		18,207	71,213	54,789		19,399	74,188	58,059		22,058	80,117

As a percentage of total mortgage lending	56.2%		9.4%	24.7%	57.1%		10.6%	26.7%	58.6%		11.6%	27.8%

1	HSBC Finance is shown on a management basis and includes lending in Canada and the UK and loans transferred to HSBC USA Inc. which are managed by HSBC Finance.
2	Total mortgage lending includes residential mortgages and second lien mortgage lending included within ‘Other personal lending’.
3	Loan to value ratios are generally based on values at origination date.
4	Amounts restated to show HSBC Finance management basis, consistent with current year.


Mortgage loan balances in HSBC Finance¹

	At 30 June 2007			At 30 June 2006			At 31 December 2006²

			Other			Other			Other
	Mortgage	Consumer	mortgage	Mortgage	Consumer	mortgage	Mortgage	Consumer	mortgage
	services	lending	lending³	services	lending	lending³	services	lending	lending³
	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m	US$m

Fixed rate	22,391	45,369	2,471	24,908	38,838	2,151	22,358	42,378	2,207
Adjustable rate	18,991	3,406	1,676	26,538	2,028	1,432	27,114	3,528	1,562

Total	41,382	48,775	4,147	51,446	40,866	3,583	49,472	45,906	3,769

First lien	33,137	42,234	1,022	40,126	35,294	849	39,404	39,406	917
Second lien	8,245	6,541	3,125	11,320	5,572	2,734	10,068	6,500	2,852

Total	41,382	48,775	4,147	51,446	40,866	3,583	49,472	45,906	3,769

Adjustable rate	14,402	3,406	1,676	20,398	2,028	1,432	21,344	3,528	1,562
Introductory interest only	4,589	–	–	6,140	–	–	5,770	–	–

Total adjustable rate	18,991	3,406	1,676	26,538	2,028	1,432	27,114	3,528	1,562

1	Management basis.
2	Amounts restated to show HSBC Finance management basis, consistent with current year.
3	Includes balances in the UK and Canada.

	Individually		Collectively
	assessed		assessed		Total
	US$m		US$m		US$m

At 1 January 2007	2,572		11,013		13,585
Amounts written off	(390	)	(5,673	)	(6,063	)
Recoveries of loans and advances written off in previous years	57		287		344
Charge to income statement	385		5,943		6,328
Exchange and other movements	(3	)	139		136

At 30 June 2007	2,621		11,709		14,330

At 1 January 2006	2,679		8,687		11,366
Amounts written off	(551	)	(3,887	)	(4,438	)
Recoveries of loans and advances written off in previous years	75		268		343
Charge to income statement	178		3,718		3,896
Exchange and other movements	(12	)	234		222

At 30 June 2006	2,369		9,020		11,389

At 1 July 2006	2,369		9,020		11,389
Amounts written off	(472	)	(4,563	)	(5,035	)
Recoveries of loans and advances written off in previous years	53		383		436
Charge to income statement	280		6,371		6,651
Exchange and other movements	342		(198	)	144

At 31 December 2006	2,572		11,013		13,585


	Half-year to 30 June 2006 (restated¹)

					Rest of
			Hong		Asia-		North		Latin
	Europe		Kong		Pacific		America		America		Total
	US$m		US$m		US$m		US$m		US$m		US$m
Individually assessed impairment allowances
New allowances	351		50		87		110		61		659
Releases of allowances no longer required	(251	)	(30	)	(79	)	(29	)	(17	)	(406	)
Recoveries of amounts previously written off	(19	)	(8	)	(13	)	(23	)	(12	)	(75	)

	81		12		(5	)	58		32		178

Collectively assessed impairment allowances
New allowances net of allowance releases	981		67		308		2,159		471		3,986
Recoveries of amounts previously written off	(122	)	(13	)	(31	)	(43	)	(59	)	(268	)

	859		54		277		2,116		412		3,718

Total charge for impairment losses on loans and advances	940		66		272		2,174		444		3,896
– to banks	–		–		–		–		–		–
– to customers	940		66		272		2,174		444		3,896


	%		%		%		%		%		%
Charge for impairment losses as a percentage of closing gross loans and advances (annualised)	0.44		0.10		0.54		1.51		2.50		0.79

	Quarter ended

	30	31	31	30	30	31	31		30
	June	March	December	September	June	March	December		September
	2007	2007	2006¹	2006¹	2006¹	2006¹	2005	¹	2005¹
	%	%	%	%	%	%	%		%

Residential mortgages	2.92	2.54	2.54	2.21	1.92	1.82	2.04		1.76
Second lien mortgage lending	5.06	4.38	4.00	2.72	1.86	1.77	1.60		1.38
Vehicle finance²	2.91	2.29	3.16	3.21	2.82	2.27	3.28		3.10
Credit card³	4.32	4.43	4.48	4.46	4.09	4.28	3.46		4.06
Private label	2.72	2.65	2.83	2.88	2.84	2.60	2.41		2.54
Personal non-credit card	9.69	9.33	9.05	8.23	7.56	7.70	8.58		8.28

Total³	4.01	3.65	3.67	3.29	2.89	2.81	2.97		2.81


1	Delinquency data excludes mortgages held for sale. Prior period amounts have been restated accordingly.
2	In December 2006, the vehicle finance business changed its write-off policy to provide that the principal balance of vehicle loans in excess of the estimated net realisable value will be written off 30 days (previously 90 days) after the financed vehicle has been repossessed if it remains unsold, unless it becomes 150 days contractually delinquent, at which time such excess will be written off. This resulted in a one-time acceleration of write-off which totalled US$24 million in December 2006. In connection with this policy change, the vehicle finance business also changed its methodology for reporting two-months-and-over contractual delinquency to include loan balances associated with repossessed vehicles which have not yet been written down to net realisable value. This resulted in an increase of 42 basis points to the vehicle finance delinquency ratio and an increase of 3 basis points to the total consumer delinquency ratio.
	Comparative information has been restated accordingly.
3	In December 2005, the acquisition of Metris was completed which included loans and advances of US$5.3 billion. This event had an effect on this ratio from the date of acquisition because of the higher mix of sub-prime within the Metris portfolio.
4	The cessation of correspondent channel originations and portfolio sales affected the delinquency rate significantly. As the mortgage services portfolio decreases, the delinquency rate will continue to rise.

					Rest of
			Hong		Asia-		North		Latin
	Europe		Kong		Pacific		America	¹	America	¹	Total
	%		%		%		%		%		%
Half-year to 30 June 2007
New allowances net of allowance releases	0.89		0.24		0.89		2.74		4.41		1.61
Recoveries	(0.08	)	(0.04	)	(0.14	)	(0.02	)	(0.42	)	(0.08	)

Impairment charges	0.81		0.20		0.75		2.72		3.99		1.53

Amount written off net of recoveries	0.83		0.24		0.60		2.40		3.07		1.39

Half-year to 30 June 2006
New allowances net of allowance releases	0.70		0.19		0.87		1.71		4.13		1.16
Recoveries	(0.08	)	(0.04	)	(0.14	)	(0.06	)	(0.56	)	(0.12	)

Impairment charges	0.62		0.15		0.73		1.65		3.57		1.04

Amount written off net of recoveries	0.71		0.15		0.66		1.71		3.59		1.09

Half-year to 31 December 2006
New allowances net of allowance releases	0.99		0.26		0.75		3.37		4.05		1.85
Recoveries	(0.20	)	(0.04	)	(0.14	)	(0.02	)	(0.50	)	(0.12	)

Impairment charges	0.79		0.22		0.61		3.35		3.55		1.73

Amount written off net of recoveries	0.81		0.26		0.60		1.88		3.39		1.21

•	loans accounted for on a non-accrual basis;

•	accruing loans contractually past due 90 days or more as to interest or principal; and

•	troubled debt restructurings not included in the above.

•	potential market movements are calculated with reference to data from the last two years;

•	historical market rates and prices are calculated with reference to foreign exchange rates and commodity prices, interest rates, equity prices and the associated volatilities;

•	VAR is calculated to a 99 per cent confidence level; and

•	VAR is calculated for a one-day holding period.

•	using historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;

•	a 1-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect the market risk arising at times of severe illiquidity, when a 1-day holding period may be insufficient to liquidate or hedge all positions fully;

•	a 99 per cent confidence level, by definition, does not take into account losses that might occur beyond this level of confidence; and

•	VAR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures.

	Foreign
	exchange and	Interest
	commodity	rate	Equity	Total
	US$m	US$m	US$m	US$m

Total trading VAR by risk type

At 30 June 2007	10.0	35.2	14.9	44.1
At 30 June 2006	6.6	26.9	5.7	21.2
At 31 December 2006	7.3	26.0	11.8	32.6

Average
First half of 2007	10.1	30.5	12.3	37.0
First half of 2006	6.4	37.9	5.4	36.7
Second half of 2006	6.2	30.0	7.5	30.1

Minimum
First half of 2007	4.4	24.5	8.1	29.0
First half of 2006	3.7	24.1	2.6	21.2
Second half of 2006	2.6	18.3	4.2	20.9

Maximum
First half of 2007	23.2	38.5	16.9	45.7
First half of 2006	12.7	53.6	7.9	52.3
Second half of 2006	11.9	43.8	11.8	42.7

Positions taken with trading intent – VAR by risk type

At 30 June 2007	10.0	31.5	14.9	39.9
At 30 June 2006	6.6	24.5	5.7	19.9
At 31 December 2006	7.3	27.9	11.8	30.2

Average
First half of 2007	10.1	30.2	12.3	36.5
First half of 2006	6.4	35.0	5.4	34.6
Second half of 2006	6.2	28.4	7.5	28.6

Minimum
First half of 2007	4.4	24.2	8.1	30.1
First half of 2006	3.7	23.6	2.6	19.9
Second half of 2006	2.6	18.3	4.2	20.4

Maximum
First half of 2007	23.2	38.1	16.9	45.1
First half of 2006	12.7	49.6	7.9	48.2
Second half of 2006	11.9	41.1	11.8	40.0

Positions taken without trading intent – VAR by risk type

At 30 June 2007	–	6.1	–	6.1
At 30 June 2006	–	4.6	–	4.6
At 31 December 2006	–	4.7	–	4.7

Average
First half of 2007	–	4.2	–	4.2
First half of 2006	–	7.6	–	7.6
Second half of 2006	–	3.7	–	3.7

Minimum
First half of 2007	–	2.3	–	2.3
First half of 2006	–	4.2	–	4.2
Second half of 2006	–	2.5	–	2.5

Maximum
First half of 2007	–	7.3	–	7.3
First half of 2006	–	10.5	–	10.5
Second half of 2006	–	7.9	–	7.9

		Mortgage
	HSBC	servicing	Capital
	Finance	rights	instruments
	US$m	US$m	US$m

At 30 June 2007	8.4	3.8	80.6
At 30 June 2006	8.1	2.5	74.3
At 31 December 2006	11.6	3.2	87.4

Average
First half of 2007	8.5	3.3	84.9
First half of 2006	15.2	3.0	65.8
Second half of 2006	16.6	2.9	78.5

Minimum
First half of 2007	5.9	2.8	80.6
First half of 2006	6.8	2.5	58.8
Second half of 2006	10.4	2.5	72.9

Maximum
First half of 2007	11.8	3.9	92.2
First half of 2006	23.0	3.9	74.3
Second half of 2006	23.9	3.5	87.4

			Impact in the preceding 6 months

			Maximum		Minimum
	US$m		US$m		US$m

At 30 June 2007

+ 100 basis point parallel move in all yield curves	(1,713	)	(1,713	)	(1,519	)
As a percentage of total shareholders’ equity	(1.4%	)	(1.4%	)	(1.3%	)
– 100 basis point parallel move in all yield curves	1,668		1,668		1,430
As a percentage of total shareholders’ equity	1.4%		1.4%		1.2%

At 30 June 2006

+ 100 basis point parallel move in all yield curves	(1,638	)	(2,010	)	(1,638	)
As a percentage of total shareholders’ equity	(1.6%	)	(2.0%	)	(1.6%	)
– 100 basis point parallel move in all yield curves	1,615		1,944		1,615
As a percentage of total shareholders’ equity	1.6%		1.9%		1.6%

At 31 December 2006

+ 100 basis point parallel move in all yield curves	(1,558	)	(1,558	)	(1,358	)
As a percentage of total shareholders’ equity	(1.4%	)	(1.4%	)	(1.3%	)
– 100 basis point parallel move in all yield curves	1,456		1,456		1,270
As a percentage of total shareholders’ equity	1.3%		1.3%		1.2%

•	being unable to defend successfully a claim brought against any HSBC company; or

•	HSBC being unable to take action to enforce its rights through the courts.