The Hongkong and Shanghai Banking Corporation Limited Annual Report and Accounts 2007 Annual Report and Accounts The Hongkong and Shanghai Banking Corporation Limited The Hongkong and Shanghai Banking Corporation Limited HSBC Main Building, 1 Queen’s Road Central, Hong Kong Telephone: (852) 2822 1111 Facsimile: (852) 2810 1112 Web: www.asiapacific.hsbc.com THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Annual Report and Accounts 2007 Contents 1 Financial Highlights Profile 2 Report of the Directors 4 Financial Review 24 Accounts 29 Notes on the Financial Statements 173 Auditors’ Report 174 Principal Offices A Chinese translation of the Annual Report and Accounts is available upon request from: Group Communications (Asia), Level 32, HSBC Main Building, 1 Queen’s Road Central, Hong Kong. The report is also available, in English and Chinese, on the Bank’s web site at www.asiapacific.hsbc.com. 本《年報及賬目 》備有中譯本，如欲查閱可向下址索取： 香港皇后大道中 1 號滙豐總行大廈 32 樓集團企業傳訊部 （亞太區）。本年報之中英文本亦載於本行之網址 www.asiapacific.hsbc.com。 Within this document the Hong Kong Special Administrative Region of the People’s Republic of China is referred to as ‘Hong Kong’. THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Financial Highlights: The Hongkong and Shanghai Banking Corporation Limited and Subsidiaries 2007 2006 For the year HK$m HK$m Net operating income before loan impairment charges 127,009 92,325 Profit before tax 78,761 52,016 Profit attributable to shareholders 58,028 37,709 At year-end Shareholders’ equity 220,854 145,450 Total equity 245,934 165,445 Total capital base 206,449 – Total regulatory capital – 183,981 Customer accounts 2,486,106 1,989,467 Total assets 3,951,939 3,150,840 Ratios % % Return on average shareholders’ equity 32.1 31.1 Post-tax return on average total assets 1.78 1.46 Cost efficiency ratio 37.1 41.4 Net interest margin 2.37 2.31 Capital adequacy ratios – capital adequacy 11.6 – – core capital 8.8 – – total capital – 13.5 – tier 1 capital – 12.3 Established in Hong Kong and Shanghai in 1865, The Hongkong and Shanghai Banking Corporation Limited is the founding member of the HSBC Group – one of the world’s largest banking and financial services organisations – and its flagship in the Asia-Pacific region. It is the largest bank incorporated in the Hong Kong Special Administrative Region and one of the SAR’s three note-issuing banks. Serving the financial and wealth management needs of an international customer base, the Bank and its subsidiaries provide a complete range of personal, commercial and corporate banking and related financial services through some 630 branches and offices in 20 countries and territories in Asia-Pacific – the largest network of any international financial institution in the region – and some 20 branches and offices in seven other countries around the world. Employing some 59,300 people, of whom 40,700 work for the Bank itself, the Bank and its subsidiaries had consolidated assets at 31 December 2007 of HK$3,952 billion. The Hongkong and Shanghai Banking Corporation Limited is a wholly owned subsidiary of HSBC Holdings plc, the holding company of the HSBC Group, which has 10,000 offices in 83 countries and territories and assets of US$2,354 billion. The Hongkong and Shanghai Banking Corporation Limited Incorporated in the Hong Kong SAR with limited liability Registered Office and Head Office: HSBC Main Building, 1 Queen’s Road Central, Hong Kong Telephone: (852) 2822 1111 Facsimile: (852) 2810 1112 Web: www.asiapacific.hsbc.com Telex:73201 HKBG HX 1 THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Report of the Directors Board of Directors Vincent Cheng Hoi Chuen, GBS, OBE, Chairman Zia Mody Dr William Fung Kwok Lun, OBE, Deputy Chairman Raymond Or Ching Fai Laura Cha May Lung, SBS, Deputy Chairman Christopher D Pratt Alexander A Flockhart, CBE, Chief Executive Officer T Brian Stevenson, SBS (appointed on 25 July 2007) Dr Patrick Wang Shui Chung Dr Raymond Ch'ien Kuo Fung, GBS, CBE David Wei Zhe Michael F Geoghegan, CBE (appointed on 1 January 2008) Stephen K Green Peter Wong Tung Shun Stuart T Gulliver Dr Rosanna Wong Yick-ming, DBE Victor Li Tzar Kuoi Marjorie Yang Mun Tak Dr Lo Ka Shui, GBS Principal Activities The Hongkong and Shanghai Banking Corporation Limited (“the Bank”) and its subsidiary and associated companies (“the group”) provide a comprehensive range of domestic and international banking and related financial services, principally in the Asia-Pacific region. Financial Statements The state of affairs of the Bank and the group, and the consolidated profit of the group, are shown on pages 24 to 172. Reserves Profits attributable to shareholders, before dividends, of HK$58,028 million have been transferred to reserves. During the year, a surplus of HK$2,432 million, net of the related deferred taxation effect, arising from professional valuations of premises and held by the Bank and the group was credited to reserves. Details of the movements in reserves, including appropriations therefrom, are set out in note 40 to the financial statements. The Directors do not recommend the payment of a final dividend. Share Capital The capital has been increased during the year by US$1,750 million (HK$13,587 million) by the issue of 1,750 million Cumulative Redeemable Preference Shares of US$1.00 each. The shares were issued in order to maintain the capital ratio at an appropriate level, to finance the acquisition of a further interest in Bank of Communications Co., Ltd and to support business growth. In accordance with Hong Kong Accounting Standard 32 Financial Instruments: Presentation, these Preference Shares are presented as liabilities in the consolidated balance sheet and the balance sheet of the Bank. Details of the movements in share capital of the Bank during the year are set out in notes 38 and 39 to the financial statements. Directors The names of the Directors serving during the year and up to the date of this report are set out above, apart from M R P Smith and J C K So, who resigned from the Board on 15 June and 10 December 2007 respectively. Directors’ Interests in Contracts No contracts of significance to which the Bank, its holding companies, its subsidiary companies or any fellow subsidiary company was a party and in which a Director had a material interest subsisted at the end of the year or at any time during the year. 2 Directors’ Rights to Acquire Shares or Debentures Certain Directors of the Bank have been granted options and conditional awards over HSBC Holdings plc ordinary shares by that company (being the ultimate holding company) pursuant to the HSBC Holdings Savings-Related Share Option Plan, the HSBC Holdings Restricted Share Plan 2000 and The HSBC Share Plan. During the year, V H C Cheng, M F Geoghegan, S K Green, S T Gulliver, R C F Or, M R P Smith and P T S Wong acquired shares in HSBC Holdings plc under the terms of the share plans. Apart from these arrangements, at no time during the year was the Bank, its holding companies, its subsidiary companies or any fellow subsidiary company a party to any arrangements to enable the Directors of the Bank to acquire benefits by means of the acquisition of shares in or debentures of the Bank or any other body corporate. Executive Committee An Executive Committee meets regularly and operates as a general management committee under the direct authority of the Board. The current members of the Committee are A A Flockhart (Chairman of the Committee), Vincent Cheng Hoi Chuen, Peter Wong Tung Shun (Directors), J W Addis (Chief Operating Officer), E D Ancona (Chief Financial Officer), R H Cox (Chief Credit Officer), C Engel (Regional Director, Personal Financial Services), P E Leech (Head of International), Margaret Leung Ko May Yee (General Manager, Global Co-Head Commercial Banking), E I Sinyak (Chief Information Officer) and R S Tait (Head of Human Resources). Audit Committee An Audit Committee, comprising three non-executive Directors of the Bank, meets regularly with the group's senior management and the internal and external auditors to consider and review the group's financial statements, the nature and scope of audit reviews and the effectiveness of the systems of internal control and compliance. The members of the Audit Committee are T B Stevenson (Chairman of the Committee), Dr Lo Ka Shui and Dr Patrick Wang Shui Chung. Donations Donations made by the Bank and its subsidiary companies during the year amounted to HK$69 million. Compliance with the Banking (Disclosure) Rules and Hong Kong Monetary Authority Supervisory Policy Manual on Corporate Governance The Directors are of the view that the Accounts and Supplementary Notes for the year ended 31 December 2007 fully comply with the Banking (Disclosure) Rules made under section 60A of the Banking Ordinance and the Hong Kong Monetary Authority Supervisory Policy Manual CG-1 “Corporate Governance of Locally Incorporated Authorised Institutions”. Auditors The Accounts have been audited by KPMG. A resolution to reappoint KPMG as auditors of the Bank will be proposed at the forthcoming Annual General Meeting. On behalf of the Board V H C Cheng, Chairman Hong Kong, 3 March 2008 3 THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED Financial Review Summary of Financial Performance Group Profit Profit attributable to shareholders for 2007 reported by Profit before tax (HK$ millions) The Hongkong and Shanghai Banking Corporation 100,000 78,761 Limited (‘the Bank’) and its subsidiary and associated companies (‘the group’) increased by HK$20,319 80,000 million, or 53.9 per cent, to HK$58,028 million in 2007. 52,016 60,000 Profit before taxation increased by HK$26,745 million, or 51.4 per cent, to HK$78,761 million.