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Wall Street Breakfast

HSBC Holdings PLC (HBC)
Q2 2007 Earnings Call
July 30, 2007, 5:45 AM ET


S. K. Green - Group Chairman
D. J. Flint - Group Finance Director
M. F. Geoghegan - Group Chief Executive
Vincent Cheng Hoi Chuen - Chairman of Hong Kong and Shanghai Banking Corporation
Stuart Gulliver - Chief Executive CIBM
Ian Smillie - ABN AMRO
Sandy Flockhart - CEO of Hongkong and Shanghai Banking Corporation
Simon Willis - NCB
Brendan McDonagh - CEO, HSBC Finance Corporation and COO, HSBC - North America


Alastair Ryan - UBS
Robert Law - Lehman Brothers
Tom Rayner - Citigroup
Tracy Yu - Citigroup
John-Paul Crutchley - Merrill Lynch
Simon Samuels - Citigroup
Nick Lord - Macquarie
Derek Chambers - Standard & Poor's Equity Research
Roy Ramos - Goldman Sachs


S. K. Green - Group Chairman

Well, good morning to everyone here in London and good afternoon, to everyone who is with us via satellite link in Hong Kong, and welcome also to those joining via webcast to our conference call.

Let me start with some introductions. First of all, here in London to my right, Mike Geoghegan, Group Chief Executive and to my left, Douglas Flint, Group Finance Director. I am very delighted to report that we've three of our non-Executive Directors of the main Board sitting right in front of me; Sir Brian Williamson, Sir Brian Moffat, Sir Mark Moody-Stuart, you are very welcome. And in Hong Kong, Vincent Cheng, Chairman of the Hong Kong and Shanghai Banking Corporation; Sandy, the new Chief Executive, particularly a warm to you and in many senses, welcome back home to you. Edgar Ancona, the Chief Financial Officer; and Russell Picot, HSBC's Group Chief Accounting Officer.

Before we start, I'd like to put up the usual cautionary statement on forward-looking statements. And I'd like to draw your attention to the key performance highlights of our results for the first half of 2007. These are record results. Profit is up 25% of the attributable level to $10.9 billion. Earnings per share are up 22% to $0.95. These results do include some one-off exceptional gains that have to do with the dilution of our interest in our China Associates; Douglas is going to explain those in more detail shortly. But because of that I am going to concentrate in what I am now going to say, on the numbers excluding those specific dilution gains and there we report really very good business growth.

Revenues up 16% to $38.5 billion, pre-tax profits up 5% to $14.2 billion, loan impairment charges up 63% on the first half of '06, but down 5% on the second half. Continued investment; costs growing at 15%, which is lower than revenue growth and yet include substantial investment in organic investment in the development of our business.

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

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

When I look at the highlights by customer group, we see that in Personal Financial Services, yes, we've seen some challenges. The U.S. mortgage services issue that we talked about and in the U.K. personal financial services have faced some challenges. Again Mike and Douglas will talk about those and so profit is down 20% to $4.7 billion. And on the other hand, our Commercial Banking business continued to perform extremely strongly. Profit before tax is $3.4 billion, up 20%. Record results in CIBM show that our strategy and it's new focus is working; profit before tax of $4.2 billion, up 32% and positive jaws of over 6%. And the leveraging of our Group connections for the benefit of our private banking client base have shown great results, with profit before tax up $0.8 billion or up 30% year-on-year.

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

D. J. Flint - Group Finance Director

Thank you, Stephen. I'd like to turn first to the Group's income statement as is reported. Net operating income before loan impairment charges increased by 19.6%. The 63.1% rise in loan impairment charges clearly stands out. This is predominately arising in the United States. The first thing to note however, is that the comparable period in 2006 was significantly advantage because of the pull forward of impairment losses into the final quarter of 2005, consequent upon the change in bankruptcy law in that quarter. The other major impact of course is the high delinquency in charge-off in our U.S. correspondent mortgage business and we'll return to this later.

Net operating income increased by 13.6% to $32 billion. Total operating expenses increased by 15.3%. And this primarily reflected business expansion, particularly in Asia as well as higher performance-related expenses and higher volumes in the transactional banking businesses in CIBM. Profit before tax increased by 13.1% and profit attributable to shareholders increased by 24.8%, as a result of our lower than normal tax charge, which I will discuss later. Earnings per share increased by 21.8% to $0.95. Dividends per share respect to the first half of 2007, $0.34 were set out in the schedule contained in our 2006 accounts.

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

Secondly the decline in the tax rate to 18.7% was driven principally by geographic mix together with some tax free gains and prior year tax settlements. And you will also recall that we sold 8 Canada Square in May of this year and for technical reasons, the gain in the sale, which should be about $1.3 billion was expected to be recognized in the second half of this year.

Turning to the next side, represent the results adjusted for the dilution gains. You can see that net operating income before loan impairment charges increased by 16.3%, which is 1% higher than the increase in operating expenses of 15.3%. The increase in profit before tax is 4.5% and the growth in earnings per share is 10.3%. And finally, this slide highlights the underlying performance against the two previous half years adjusting for both the dilution gains and stripping out the effect of currency movements and acquisitions and disposals.

In terms of underlying performance for the first half of 2007 against the first half of 2006, there was a continuation of double-digit growth in net operating income before loan impairment charges. This was 11.3%, which is 1.6 percentage points higher than the growth in operating expenses of 9.7%. The modest growth in profit before tax reflects the 57.4% growth in non-impairment charges. But against the second half of 2006, there was a strong recovery in profit before tax in the first half of 2007, up 33.4%. This of course reflected significant improvements in our U.S. businesses and strong growth in corporate investment banking and markets and all across Asia.

Analyzing results by geography; let's start with Asia. And whatever we discuss financial performance in Asia we're excluding the dilution gains. Asia continue to produce excellent results, with profit before tax up by 30%. With the profit before tax contribution of $5.6 billion, Asia accounted for 43% of Group profit. The strong growth was broadly based across all customer groups, with Personal Financial Services and CIBM outstanding.

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