(3"#"ANKPLC HSBC BANK PLC Table of Contents Page Page Financial Highlights .......................................................1 Consolidated income statement for the year ended 31 December 2005 .............................................................20 Business Highlights ........................................................2 Consolidated balance sheet at 31 December 2005 .....21 Financial Review ............................................................3 Consolidated statement of recognised income and expense for the year ended 31 December 2005.......22 Summary of Financial Performance.............................3 Consolidated cash flow statement for the year ended Capital Management......................................................5 31 December 2005.....................................................23 Board of Directors and Senior Management ...............8 Balance sheet for HSBC Bank plc at 31 December 2005............................................................................24 Report of the Directors ...............................................10 Statement of recognised income and Expense for Statement of Directors’ Responsibilities in Relation HSBC Bank plc for the Year Ended 31 December to the Director’s Report and the Financial 2005............................................................................25 Statements .................................................................18 Cash flow statement for HSBC Bank plc for the year Independent Auditors’ Report to the Member of ended 31 December 2005..........................................26 HSBC Bank plc .........................................................19 Notes on the financial statements................................27 Presentation of Information This document comprises the Annual Report and Accounts 2005 for HSBC Bank plc (‘the bank’) and its subsidiary undertakings (together ‘the group’). It contains the Directors’ Report and Accounts, together with the Auditors’ report, as required by the UK Companies Act 1985. HSBC BANK PLC Financial Highlights 2005 2004 2003 2002 2001 £m £m £m £m £m For the year 1,2 Profit on ordinary activities before tax ................................ 3,786 2,953 2,810 2,773 2,757 Profit attributable to shareholders of the parent company.... 2,897 2,057 2,046 1,867 1,937 At year-end Shareholders’ funds of the parent company......................... 19,091 16,828 17,064 16,455 15,648 Capital resources ................................................................. 19,677 16,424 14,603 12,768 12,209 Customer accounts and deposits by banks........................... 239,673 193,664 175,390 155,234 147,665 Total assets.......................................................................... 386,422 292,481 246,104 218,378 202,309 Ratios (%) Return on average shareholders’ funds (equity) of the parent company............................................................... 16.7 12.7 8.5 8.5 9.3 Capital ratios ....................................................................... — total capital ..................................................................... 10.8 10.5 10.7 10.3 10.7 — tier 1 capital.................................................................... 6.9 7.4 7.4 7.1 6.8 Cost:income ratio ............................................................... 57.3 59.5 62.9 58.7 59.0 Cost:income ratio including net insurance claims ............... 58.5 64.2 ––– Profit on ordinary Cost:income ratio (%) Capital resources (£m) activities before tax (£m) 4,000 64.0 25000 3,786 3,500 63.0 62.9 62.0 20000 3,000 19,677 2,953 61.0 2,810 2,773 2,500 2,757 60.0 15000 16,424 14,603 2,000 59.0 59.5 12,768 59.0 12,209 58.7 58.0 10000 1,500 57.0 57.3 1,000 56.0 5000 500 55.0 0 0 54.0 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001 2005 2004 2003 2002 2001 1 The 2004 and 2005 financial highlights are prepared in accordance with IFRSs as endorsed by the EU. 2 2004 financial highlights excludes IAS 32, IAS 39 and IFRS 4. The 2001, 2002 and 2003 financial highlights are UK GAAP as previously reported. 3 The profit on ordinary activities before tax and the profit attributable to shareholders for the years 2001 – 2003 exclude goodwill amortisation. The financial highlights are influenced by changes in the group structure over the five years. The most significant acquisitions are as follows: in 2001, HSBC Investment Bank Asia Limited, Banque Hervet, Demirbank TAS, HSBC Guyerzeller Bank AG; in 2002, HSBC Trinkaus & Burkhardt KGaA, HSBC Republic Bank (UK) Limited and activities of HSBC Investment Bank plc; in 2004, Marks and Spencer Retail Financial Services Holdings Limited. 1 HSBC BANK PLC Business Highlights Summary • Net operating income before loan impairment charges up £1,518 million, 16 per cent • Profit before tax up £833 million, 28 per cent UK Personal Financial Services (“PFS”) – profit up £161 million, or 24 per cent • A range of UK marketing campaigns, including the first ever ‘January Sale’ by a high street bank, heightened brand awareness and increased market share in most product lines • Successful integration of Marks and Spencer Retail Financial Services Holdings Limited (“M&S Money”) • Strong growth in mortgages and credit cards* í 22 per cent rise in mortgage balances, enhanced by widening spreads í market share of gross UK mortgage advances increased, despite overall market contraction í credit card advances increased 18 per cent driven by competitive pricing and marketing • Strong growth in current, savings and deposit account balances* í sales of new savings accounts grew significantly, driven by competitive pricing and the launch of new products, with substantial growth in online products, particularly in First Direct í growth in savings balances was more than offset by reduced spreads UK Commercial Banking – profit up £136 million, or 20 per cent • Continued growth in customer base; 20,000 customers switched their banking relationship from other financial institutions, the largest share of any UK retail bank customers switching their banking relationship from other financial institutions • Strong growth in lending with a 23 per cent increase in balances, and an increase in market share • Customers increased 6 per cent • Current account customers increased to over 700,000 and balances rose 12 per cent • Deposit balances increased 11 per cent driven by marketing and competitive pricing UK Corporate, Investment Banking and Markets (“CIBM”) – profit down £115 million, or 23 per cent • Balance sheet management revenue declined due to a flattening yield curve limiting reinvestment opportunities, and rising costs of funds • Customer balance growth drove 14 per cent rise in Global Transaction Banking revenues • Significant restructuring expenditure on IT systems and people, although expense growth slowed in the second half of the year International Banking – profit up £324 million, or 102 per cent • Turkey profit before tax increased 97 per cent, due largely to growth in credit card balances France – profit up £92 million, or 25 per cent • Marketing related to the rebranding of five subsidiaries assisted in a 54 per cent increase in mortgage sales • Increase in loan impairment releases following several corporate restructurings • Gains on disposals of £106 million, reflecting private equity and investment portfolio disposals Private Banking – profit up £162 million, or 46 per cent • Strong balance sheet growth in the UK and Switzerland • New Wealth Management team in Germany, successful in generating £13.1 billion of net new money Total operating expenses – up by £352 million, or 6 per cent • Lower operating expenses in UK PFS and Commercial Banking • £254 million of additional costs, primarily for the expansion of CIBM capabilities • Staff costs increased 9 per cent in France • Costs in Private Banking increased, reflecting front office recruitment and higher performance-related bonuses in line with revenue growth Loan impairment charges – up £405 million, or 109 per cent • Asset growth in UK PFS and Commercial Banking combined with declining credit quality in UK personal lending • Releases and recoveries in CIBM in 2005 were slightly lower than prior year * Balances quoted exclude the impact of the acquisition of M&S Money 2 HSBC BANK PLC Financial Review Summary of Financial Performance Consolidated Income Statement 2005 2004 £m £m Net interest income .................................................................................................... 4,042 4,480 Net fee income........................................................................................................... 3,355 3,032 Other income ............................................................................................................. 3,633 2,511 Operating income....................................................................................................... 11,030 10,023 Net insurance claims incurred and movement in policyholders’ liabilities................ (230) (741) Loan impairment charges........................................................................................... (776) (371) Net operating income............................................................................................... 10,024 8,911 Total operating expenses............................................................................................ (6,315) (5,963) Operating profit....................................................................................................... 3,709 2,948 Share of operating