HSBC Holdings plc HSBC Holdings plc 8 Canada Square Annual Report London E14 5HQ HSBC Holdings plc and Accounts United Kingdom Telephone: 44 020 7991 8888 Facsimile: 44 020 7992 4880 Web: www.hsbc.com Annual Report and Accounts 2002 Annual Report and HSBC HOLDINGS PLC Table of Contents Page Page Financial Highlights............................................... 1 Report of the Directors ...................................... 153 Five-Year Comparison........................................... 3 Directors’ Remuneration Report ...................... 170 Cautionary Statement Regarding Statements of Directors’ Responsibilities in Forward-Looking Statements ............................... 5 Relation to Financial Statements...................... 187 Certain Defined Terms .......................................... 6 Independent Auditors’ Report ......................... 188 Information about the Enforceability of Financial Statements ......................................... 190 Judgements Made in the United States ................ 6 Notes on the Financial Statements ................... 195 Exchange Controls and Other Limitations Affecting Security Holders .................................... 7 Taxation of Shares and Dividends ................... 314 Description of Business.......................................... 8 Shareholder Information .................................. 317 Description of Property ....................................... 34 Organisational Structure .................................. 321 Legal Proceedings ................................................ 35 SEC 20-F Cross-Reference Sheet and Glossary.............................................................. 322 Financial Review .................................................. 36 Index................................................................... 325 Other Information.............................................. 143 Board of Directors and Senior Management ... 149 This document comprises the Annual Report and Accounts 2002 and the Annual Report on Form 20-F 2002 to the US Securities and Exchange Commission (‘SEC’) for HSBC Holdings plc and its subsidiary and associated undertakings. It contains the Directors’ Report and Financial Statements, together with the Auditors’ Report thereon, as required by the UK Companies Act 1985. The Annual Review 2002 of HSBC Holdings plc is published as a separate document. HSBC HOLDINGS PLC Financial Highlights HSBC prepares its financial statements in accordance with UK Generally Accepted Accounting Principles (‘UK GAAP’). It uses the US dollar as its reporting currency because the US dollar and currencies linked to it form the major currency bloc in which HSBC transacts its business. Following its listing on the New York Stock Exchange, HSBC also reconciles certain financial information to US Generally Accepted Accounting Principles (‘US GAAP’) which differ in certain aspects from UK GAAP as explained on page 286. Cash basis items are non-GAAP measures which are derived by adjusting reported earnings to eliminate the impact of the amortisation of goodwill arising on acquisitions. HSBC judges its overall performance by comparing cash returns with cash invested. HSBC therefore considers that cash basis measures provide useful additional indicators of performance for investors. 2002 2001¶ US$m US$m For the year (cash basis) Operating profit before provisions................................................... 11,641 11,283 Profit on ordinary activities before tax............................................. 10,513 8,807 Profit attributable to shareholders.................................................... 7,102 5,799 For the year (as reported) Operating profit before provisions................................................... 10,787 10,484 Profit on ordinary activities before tax............................................. 9,650 8,000 Profit attributable to shareholders.................................................... 6,239 4,992 Dividends......................................................................................... (5,001) (4,467) At year-end Shareholders’ funds ......................................................................... 52,406 46,388 Capital resources.............................................................................. 57,430 50,854 Customer accounts and deposits by banks ....................................... 548,371 503,631 Total assets....................................................................................... 759,246 696,245 Risk-weighted assets........................................................................ 430,551 391,478 US$ US$ Per ordinary share Basic earnings.................................................................................. 0.67 0.54 Cash earnings................................................................................... 0.76 0.63 Diluted earnings............................................................................... 0.66 0.53 Dividends......................................................................................... 0.53 0.48 Net asset value at year-end............................................................... 5.53 4.96 Share information US$0.50 ordinary shares in issue (million)...................................... 9,481 9,355 Market capitalisation at year-end..................................................... US$105bn US$109bn Closing market price per share at year-end...................................... £6.87 £8.06 HSBC Benchmark Total shareholder return to 31 December 2002* – over 1 year.................................................................................... 89 76 – since 1 January 1999†................................................................... 155 95 * Total shareholder return (‘TSR’) is defined on page 174. † HSBC’s governing objective is to beat the TSR of its defined benchmark, with a minimum objective to achieve double TSR over a five-year period beginning on 1 January 1999. ¶ Figures for 2001, excluding average risk-weighted assets, have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which are set out in Note 1 on the Financial Statements on pages 195 to 197. 1 HSBC HOLDINGS PLC Financial Highlights (continued) 2002 2001¶ Performance ratios % % On a cash basis Return on invested capital ........................................................................... 12.8 11.2 Return on net tangible equity........................................................... 19.8 17.4 Post-tax return on average tangible assets........................................ 1.11 1.00 Post-tax return on average risk-weighted assets .............................. 1.95 1.76 On a reported basis Return on average shareholders’ funds............................................ 12.3 10.4 Post-tax return on average assets .................................................... 0.97 0.86 Post-tax return on average risk-weighted assets .............................. 1.74 1.55 Efficiency and revenue mix ratios Cost:income ratio (excluding goodwill amortisation)...................... 56.2 56.4 As a percentage of total operating income: – net interest income ....................................................................... 58.1 56.9 – other operating income................................................................. 41.9 43.1 – net fees and commissions............................................................. 29.4 28.9 – dealing profits............................................................................... 4.9 6.5 Capital ratios Tier 1 capital.................................................................................... 9.0 9.0 Total capital ..................................................................................... 13.3 13.0 ¶ Figures for 2001, excluding average risk-weighted assets, have been restated to reflect the adoption of UK Financial Reporting Standard 19 ‘Deferred Tax’, details of which are set out in Note 1 on the Financial Statements on pages 195 to 197. The following explains the non-GAAP cash basis measures and how they are derived from the equivalent reported measures. The cash basis operating profit before provisions can be reconciled to the equivalent reported measure by deducting goodwill amortisation of US$854 million and US$799 million for 2002 and 2001 respectively. The cash basis profit on ordinary activities before tax and cash basis profit attributable to shareholders can be reconciled to the equivalent reported measures by deducting goodwill amortisation, including that attributable to joint ventures, of US$863 million and US$807 million for 2002 and 2001, respectively. Cash basis earnings per ordinary share are calculated by dividing cash basis profit attributable to shareholders (as explained above) by the weighted average number of ordinary shares in issue during the year which is the same number used in the calculation of basic earnings per share on a reported basis. The definition of return on invested capital and a reconciliation to the equivalent GAAP measures is set out on page 53. Average net tangible equity and average tangible assets are calculated by deducting average purchased goodwill net of cumulative amortisation of US$15.0 billion. The calculation of both the cash basis and reported basis average risk-weighted assets are derived from the same regulatory measure. 2 HSBC HOLDINGS PLC Five-Year Comparison 1998 1999 2000 4 20014 2002 US$m US$m US$m US$m US$m At year-end Share