HSBC Holdings plc (HSBC) Q2 2007 Earnings Report, Transcript and Summary

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%…

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…

Thank you, Douglas. Six months ago, Stephen outlined the split of management responsibilities between us, with Stephen focusing on the strategy and me with the Group managing Board on its implementation. Let me update you now on our progress today. We seek to balance the contribution from our businesses. We've already broadly achieved the balance of the earnings mix we want with half from Asia, the Middle East and Latin America, and half from Europe and North America. But that doesn't mean the job is done. The challenge is to improve the contribution mix from both parts. We will continue to go for sustainable growth and we will execute much more efficiently in developed market. Meanwhile, we will continue to invest organically and by acquisition in developing markets in the pursuit of strong consistent growth. It's worth recalling that our historic roots like deep and emerging markets. Our recent history features a blend with developed economy. It's that balance that sets us apart and constitutes a major opportunity. Our future lies in building the links between the two. As the number one international bank in Asia and the number one in Hong Kong, we have distinct advantages and opportunities; we are making the most of it, with profit before tax from Asia up strongly by 30% in the first half to $5.6 billion excluding the net dilution gain. We are increasingly managing our Hong Kong and Mainland China business as a whole, as the economic integration in China continues. We are among the first banks to incorporate locally and intend to remain the number one international bank in China. We are targeting international corporate and commercial clients and on the personal side, attracting more global Premier customers. Our China business is well on the way to being a $1 billion…

Mike, thank you very much. And I would like to spend a minute or two on our view of the macroeconomic outlook, which as you will appreciate is a particularly interesting one at the moment, and indeed it's in many senses a tale of two hearts. On the one hand when you look at real economic growth, we will see a pretty robust level of growth continuing this year and towards the next, a tad lower than offshore perhaps but only a tad. The US economy still expected to grow, clearly more slowly than last year, but nevertheless still expected to grow despite the week housing market and the grandeur disentangling is the importance of the U.S. consumer for world economic growth, with greater momentum coming from the domestic markets in Europe, Japan and in emerging markets, such that overall, we are pretty confident about the overall level of growth and d the emerging markets in particular, we expect to continue to power ahead. On the other hand, we have seen all of us in the market, some turbulent conditions, reflecting a pervasive feeling with asset prices are now very stretched in several markets and clearly risk premier are rising. There is a concern in a number of markets about inflation, and weak income interest rates in the major markets, are frankly unlikely to fall. And there is a clear risk of asset pricing dislocation, where credit structures are being particularly stretched. In this context, the Group we believe is well positioned to continue to invest for sustainable growth on a diversified basis. We will continue to maintain strong capital ratios and we will continue our prudent stance on risks. Let me now leave you with the highlights, as we are very happy to take questions both here and in Hong Kong. Please, as we come to the question if you could raise your hand and wait for the microphone to get to you and Vincent in Hong Kong, if I could perhaps invite you to invite somebody to raise the first question, Vincent? Question And Answer

Thank you Stephen. And questions from the floor? We don't seem to have any yet, Stephen.

Okay, well I'm in London. Yes Alistair.

[Question inaudible] Canada Square, would that also be booked as a tax free gain in the second half. The other question relates to U.S. non-mortgage delinquency trends, if you could give some color on that. And lastly, you talked about building up insurance, is that largely an organic strategy or the Group be contemplating acquisition? Thanks.

Thank you. Thank you for the questions, so we actually missed the first half of your first question here in London, I will get Vincent to repeat it if I may. Vincent?

First question is on the booking of the Canada Square product, is that right?

Vincent, thank you. If I may, I'll get Douglas to talk to the first one, Mike to the second one on the non-mortgage delinquencies in the U.S. and I will cover our insurance strategy. Douglas?

The gain we expect to be taken in the second half of the year, the gain will be taxable but we have... we have some capital losses within the Group, so I think the effective tax rate will be lower significantly, lower than the standard rate.

On the mortgages side, the non sub-prime mortgages, our consumer finance business, that's the business driven through our branches, is performing well, our credit card business did well, pricing power is coming back in a number of product lines. On the prime mortgages, we don't see any deterioration and as matter of fact most mortgages are go through our branch network, which was specifically or mainly in the state of New York and we all know prices of real estate in the city of New York have held up very well. And we don't have all table, we don't have option ARMs which effect California. So overall, we are comfortable with our book, and we are also managing the mortgage services element that's what we are focusing on.

Thank you, Mike. And as far as insurance is concerned, you asked about our strategy or whether it's organic or by acquisition. The answer is essentially organic and is very focused on distribution. What we have is the power of distribution. We have 125 million customers, something like 15% of those take insurance products from us, whereas you would be well aware of course the vast majorities are taking insurance from some body. So that's a tremendous distribution opportunity and that's what we are focusing on. There is to some extent an opportunity to grow our customer base. Mike has mentioned the memorandum of understanding that we have signed in the case of India with two of the state banks to give exclusive access to their client bases and that's 40 million people for insurance services provided through a joint venture that we will establish. So that's the kind of thing that we'll be doing, very much distribution led and very much I think in our power to pull off, to bring about, to realize because of all the extraordinary franchise that we've got. So thank you for the question. Let me now, if I may turn to Alistair Ryan here in London.

Thank you. Alastair Ryan at UBS, and two questions if I may. First, the process of full borrowings and loan rearrangement in mortgage services business, to a degree that's kind of bringing forward potential future about debts to actual charges in the current period, if I understand the math of the process correctly. Can you give us a sense of how much of the charge in the first half was really the actions that you took and draw forward charges you would have incurred in the future, so not that there won't be more of that again in the second half, but things that will happen in 2008, but just a sense that how much you can get there. And then secondly, for Stuart really, how should we think about the major drivers of the revenue for your business now? If it's not CDOs and is to a volumetric degree leverage lending, which always we will welcome, and is it as simple as emerging market growth or is it much broader than the other obviously the balance sheet management to states something of a recovery after three difficult years? Thanks.

Alastair, thank you. And if I may, on the first question, let me get Douglas to talk to the specifics on the numbers and Mike, if you want to add anything on the business actions. But Douglas?

Okay, what we are doing is a whole variety of things. During the first half of the year, we contacted something like 19,000 customers and discussed the impact on their partial financial position of... on resets. We then as a consequence of that, modified about 5,000 of... those modifications have a variety of actions extending from formal rewriting of the loan which I think is what you are describing were in fact you actually rewrite the loan to different terms and take the discounting cash flows, the new cash flows, bring about a present value and take an adjustment. That's probably not the majority, the majority is in fact extending the low payment period for the period of time effective we are just letting people take a little bit longer to see how they can accommodate. Now the good news is that those loans we have modified are tracking better than we expected. They are showing the benefits of modification are working for our customers' interests and for our own. But in volume terms, it relatively modest, we modified about $700 million worth of loans in the first half of this year, we expect to do more in the second half of the year. So in relation to bringing forward, I don't think that's a particularly large element of the charge.

And the modifications I think for 12 months?

Typically, yes.

And on the second question of Stuart, can you speak for Mike, I think Stuart.

Thank you. I mean we feel pretty good about these results because we focused our strategy into a series of kind of niches within the capital markets where HSBC either has or we believe can get a competitive edge. And I think you can see that this set of numbers tends to predict that's working. This a very broad platform by product, although you can see substantial improvement in balance sheet management and private equity, if you take those out, equity was still up 18%, global markets was up 26, global banking up 11, the balance sheet I'd say was up 46, the overall thing up 32. And this tremendous diversity by product and credit rates, where we do invest tremendously in our derivative platform, we've got substantial increases half on half, for both half in the structure derivative numbers, directly because we have invested in those areas. And so the honest answer is it's a broadly diversified platform. It's across a number of geographies, the emerging markets, and in particular as Mike was saying Latin America and Asia 49%, but actually Europe and Asia accounted for 83% of the total number. And it's a credit and rates derivative, emerging market with a modest leverage acquisition finance business which is a growing business, but it's a modest one at this moment in time. But we feel it's actually a platform that has got tremendous legs to it still and it is now one that fits HSBC and I think that's the most pleasing aspect as we now actually have three quarters of this working all the while.

Well, thank you. Vincent, question from Hong Kong?

Thank you, Stephen. Any question?

If not Vincent --

There appears to be none at the moment.

Then in that case, Vincent let me take a number here from London. Sir, towards the back.

Thank you. It's Ian Smillie from ABN. I have a question for CIBM please. Stuart, the division's delivery there over the last two or three years has been quite volatile. Are you encouraging us to come to the end of thinking about the volatility within the division's earnings, would be the first question. And the second question is if that is true, could you give us some sense of the sort of growth rate that you should be encouraging us to think about because clearly there is quite a lot that we could start to think now that the engines look like they are coming through?

Ian, thank you. Mike?

I don't think I can do with second, we should find a way of appropriate forecasting. I guess what I would say is that, I am going to choose my words carefully, the volatility that we may have created ourselves is behind us in the sense that we have a mature business model that we will stick to. The volatility that occurs to all of our businesses because of the market account coming from, I think that will be a fair way of dealing with the question.

Okay. Back to... just briefly back to Honk Kong, any questions now? No, okay.

Gentlemen, in front.

Firstly thank you for the additional disclosure on the Asia divisional operations, I am picking on those. Wonder if you can comment on given that the consumer business in India is not currently contributing to your profit, on the size of your investment plans within that business and what sort of timeframe your investments in India is hitched over? Thank you.

Yes. Thank you. And if I may just make a general comment and I will pass the question to Mike on some of the business specifics. But generally, we see India as one of the three or our markets to have developed a most significant strategic opportunity over the medium term, for all the obvious reasons, the lower large numbers. This is a banking market which is quite strong. It got the tremendous economic growth in this and I believe that's largely sustainable now and therefore, you will see us investing in India in ways that see good and opportune. You are probably aware that as of now foreign banks have pretty tight restrictions on what they can do by way of organic... or inorganic investments in India and of course, we will develop our business within those, within that context, in that framework. As and when that framework were to evolve, we will clearly be looking at the opportunities if that presents for us. Well in the mean time, we will grow organically through our existing businesses, our existing network and we are investing substantially in our consumer business in India, and that's part of the reason, but I will let Mike amplify on why the current P&L is so low because we are putting a lot of investment into it.

Well, you have answered it already for me. It means we are growing in the card business, but the infrastructure going, in the outside sales force is all those types of putting a fair bit of cost upfront. And also on the insurance side, we get the distribution with Canara Bank and getting that through the 40 million customers. There a lots of things to go there and I think that will play out to other products as well. So, there is a number of things going on. I am not concerned of the short period of time that the revenue line hasn't grown as substantially as fast as part of the cost line and that's what not you would want me to do, you would want me to invest this present time then we will acquire when we can with WTO.

Alright.Question from London. Robert?

Robert Law of Lehman. Could I ask you to comment about the revenue growth in Hong Kong please? And it's certainly particularly strong for us in the first half, could you comment on what are the key drivers of that was so we can make some conclusion about how sustainable it might be?

Robert, thank you and can I turn the question to Vincent and Sandy, Revenue growth in Hong Kong, sources of any.

Thank you, Stephen. I think revenue growth in Hong Kong has been driven by all lines of business, PFS, CMB, CIBM, our private banking insurance. Basically, we are doing extremely well in all areas of businesses. Partly of course is because of the market which has been buoyant, but also because of the joining of which we have made, which makes our CMB business strategy much more attractive to our customers. And of course in China as I mentioned has also played a major role in that one. So its good performance across all lines of businesses really. Sandy?

That focus on wealth management that you have seen in Hong Kong has really paid off dividends, obviously markets have helped. But in fact the growing wealth and affluence in our customer base and the product that we are selling them is giving us profitability. I'd also just like to a few comments about that Indian business. Our Indian business is very profitable, made profit before tax of $299 million and I think you've got to see us invest in some of our businesses. And we only started that business in October '06. So I think two or three years of investment is probably what you've got to look at before you start seeing any returns coming back.

Sandy, Vincent, thank you.

Thank you very much. Good morning. It's Tom Rayner from Citigroup. Can I have a couple of questions please, with the first one going back to the delinquency trends in the U.S. non-mortgage services? I know it in some of the text inside the big release, you do talk about seasoning still on the consumer lending balances when I look at the second quarter, it's a quite a big jump Vincent, in personal non-credit card and it has been terms being deteriorating for some time. So I just wondered if I could tighten you up on the comments regarding the U.S because clearly you are happy with the reserving against mortgage services, the provisions were up very much in line with your expectation. Is the same true in all of these other sort of non-mortgage service areas in the U.S, will might have be, some additional reserving required you think?

Thank you. Douglas, are you prepared to be tightened up.

I think a number of factors to know, the end of '05, we bought Metris, which brought in a large lower, lower than prime credit card business and that's expanded, we grew in the unsecured area and in credit cards quite notably in the second half of '06 and at that seasoning in part is driving the impairment charges in the delinquency which is a mix and pat into '07. And then you have just, if you look at the branch based business, the cards business and the unsecured business, these have grown while mortgage services have declined and as they have seasoned, we have seen normal life levels of delinquency come through. I think the important thing is those delinquency levels are in line with the pricing parameters when we took the business on. But they are in line with our expectation.

The word the contingent word is I guess is one, we are trying to avoid it.

We have avoided that.

Okay

But we continue to... obviously, we continue to look for it, it's not showing up at the present time and we will look and continue to look.

Okay, thanks very much. My second question is just on the refunds on the account count base in the U.K. I mean clearly, a less important issue for you than some of other U.K. banks maybe. $236 million, can I just ask you little bit more about that. Do you think that the expense of the issue for you guys and if it is, I think you have a 16% market share roughly, I mean does that imply $1.5 billion is the scale of the industry problem are you significantly better, do you think than the industry on this one?

Well, the OFT's case I think is a wise way to go to find out what it should be done in this complex situation. Everybody has got different documentation; everybody has different pricing over different periods. I don't think you can just multiply by that. I mean you are going to see that some people not going to bother, other people are, they are looking at it in a different ways. And I think we got to work it away from CDO outcome because that might be a solution that is not necessary just multiplying will give you.

But what is the case? Did you, you kind of alluded to it. It is a relatively smaller issue perhaps than for many of the obvious comparator banks in the U.K., for PFS in the UK is 7% of our total group business, we are the fifth largest bank in the U.K. market. And for us actually commercial banking is much more important than our PFS business. So our profile is different, from some of our obvious competitors. But I think like everybody, I strongly believe that this case is now being ruled by the OFT, which is necessary and is the right way to go. We need but we and the customers, and the regulators all need legal clarity on this issue. Just nonsense for the core banking product should be in such uncertain legal territory, as it turns out what it is. The question from Hong Kong perhaps,

Thank you, Stephen. We don't seem to have any at the moment. The lady at the back.

Okay. Well, then let me --

I am Tracy Yu from Citigroup. I have a question on Hong Kong and rest of Asia. Despite, the relatively high increasing cost around 11% for Hong Kong and almost 30% for Asia, you still have improvement in cost to income ratio, especially for Hong Kong it is around 32% one of the lowest in the history. And you comments on how sustainable on this relatively low cost to income ratio in an inflationary environment, especially, our labor market is actually quite tight? Thank you.

Vincent, can I just first asks Mike to say a few words and then clearly you and Sandy, may well want to elaborate. Mike?

As exactly for this reason where you see pressures on labor markets that we go for automation, outlined what we've done so far is only just a beginning. We believe our automation capabilities across the globe by leveraging what we've got in one market and take it to another market is a major advantage, which we intend to take forward to keep our cost base low. But, clearly Sandy and Vincent may want to add to that so I hand it over to them.

Vincent?

Thank you, Mike. You are right to point out that we are under our cost pressure, but we just hope that automation, third automation, full processing that help us to keep unit costs down. On the other hand, on the revenue side, we believe that Asia Pacific, Hong Kong, China will continue to grow. We will be able to expect revenue to go up, I don't want to forecast where the cost income ratio should be, but of course we would hope that it would continue in a favorable trend. Sandy?

It will be... continue to invest in our business is appropriately and to that extend I think as you look across the region, there maybe places where we have to put money upfront before we get the revenue back. So, I can see situations where we could possibly have the costs going up in the short term, but equally as well that we have good revenue growth and the key obvious is to make sure it's good revenue growth.

Sandy, Thank you.

Thank you, Stephen, back to you.

Good morning. It's John-Paul Crutchley from Merrill Lynch. Strong revenue growth obviously in the Asian franchise, and I really just want to ask the question about the capital intensity of that growth. It seems to be a very large increase in the risk weighted assets in the Hong Kong and Shanghai Banking Corporation about $70 billion or so since the year end. And I can't quite reconcile that back against how the loan balance have moved over the same period. So, I guess all of that is presuming coming from the capital market side of the business. I just want to can you elucidate a bit more on where the growth is come from, what we should think about that as sustainable rate of growth of risk assets in that businesses over the some lumpy issues over the balance sheet end which contributed to that?

Well, thank you, thank you. Douglas?

Well, I think just as you described it I mean that there is good loan growth across the region. The capital markets business has been a user of capital, but this... the loan growth is there, the asset growth is as you see, nothing particular to draw attention to.

I'd also said the deposit growth is there as well.

The point was that I guess the risk asset growth is growing outsize versus the loan growth. So, it looks that it's much more coming from the capital market throughout the business and should we therefore extrapolate that level of risk asset growth going forward or was specific issues have been at the half year end?

I certainly wouldn't extrapolate that with the growth, no.

I think overall if you'd recognized John-Paul, which is very high return on capital business and when the strong growth it is one where we think we should be investing good capital and we'll continue to do so. Simon?

Yes. Thanks good morning. It's Simon Samuels from Citigroup. Couple of questions actually; one is just back to the U.S. in the mortgage service business. I think Mike, you've said about a third of the first half shrinkage was to do with sell downs, which obviously is a bit surprise to see only because I think you all, you think your collections policies above the industry and obviously you've got the balance sheet that you can carry on keeping the assets on your balance sheet because you always want really. So can you just talk about the sort of interaction of sell downs going forward and particularly whether that's going to be a big feature for shrinkage of the mortgage service portfolio?

Well, Clearly, we are working to a strategy of getting out of correspondent bank mortgages and that means we will work them out with our customers or if we can sell down the risk, we will. And as we said in the second half, it depends how the market behaves and we... it's a mixture of a number of different things. And frankly, a lot of customers believe and not do actually refinancing sales and go with other borrowers; it's not all kind of a dome and gloom. And so that book generally spun off about $2.5 billion every year for the people who refinance them, but we are bringing it down as fast as we can, and if the pricing is right we will unload more.

And just a... I think you said in your comments, but I will say, I think you said in the print but not in your verbal commentary, but am I right in saying that the first half pace of decline is what you are expecting for the second half?

No, I think what we said is market dependence, we would continue to work it down, I don't giving no projections what we will get it down to, you will have to come back to this room to see what it is at the end of year.

The second that related question was to do with the strategy in the CIBM division. You've got a business now that's about $17 billion annualized run rates of revenues. So, it's pretty substantial, but at the same time it's very low level of exposure to debt equity and investment bank. I think they only allow 15% contributions, and if I'll take you back to the sort of managing for growth today, three, three and a half years ago, I think the aspirations there was to get reasonably high off and great lead tables particular M&A lead tables in each geography around the world, and I didn't think you are there in any of them yet and my question really is... you sort of... and it sounds that maybe you kind of stumbled into a debt type of investments banking like Barclay for example in. I mean you had aspirations I mean to be a much bigger investment bank in equities, are those aspirations going away forever or would you see there is some change in the shape of the CIBM division going forward?

Simon if I may, I would like to respond in part of that, and then I want to hand the mic to Stuart to elaborate. We have refined the strategy, I think it probably is true to say that if one looks back a couple of years or so, that we have expressed aspirations to be bigger in M&A per se, but to be clear, we have refined this not merely in order to as it roll back to us in the way that you are implying but because actually we think it's the right thing to do. We announced this earlier this year. I thought we were focusing this group, more strongly back onto emerging market, and that involves amongst many other things, the fine tuning of our CIBM strategy. Recall that's where we have clear competitive strength. We don't think it is sensible to go toe to toe with the number of other great houses represented in this room, in the domestic U.S. market for instance. We think the right thing to do is to focus on our obvious strength, but we think this is not a backup strategy either, this is still same and both Mike and Stuart also have quoted the kinds of transactions that we have been doing clearly in M&A that focus on emerging markets. Does that mean that we care about being in the big ticket lead tables in M&A? No, it doesn't because that's not we are about. We are about doing a business that's totally to our competitor's strength. Stuart, would you like to elaborate further, you got a mic, yes.

Yes, I have a mic. Okay, look it's exactly the case that the position that we set out in 2003 has been modified. There was a sense that was picked up by the marketplace that we were trying to be a global bolt-bucket firm, which as a universal bank we're not able to compete with. So therefore, we have modified and precisely focused this into being emerging market led and finance focused and therefore that is a change. And that therefore means that we are more focused on credit and rates, derivatives, financing, and less on M&A and equities. But I say less because the Barclay comparisons aren't right either. There is the problem with HSBC is, we have designed a CIBM businesses to suit our clients and our marketplace and that doesn't actually match to anyone else's. So if you want a synthesis of what this is, it is kind of Citi, JP Morgan, Barclay, and Standard Chartered, so that you can pick up the equity part, the emerging market part, the derivatives and the fixed income part. So, it isn't easy to fit this into nice little sound bite. So it isn't Barclay, but it absolutely isn't Goldman Sachs either. And I think what you can see is, what we have gotten now works for HSBC, works for our customers.

Stuart, thank you. You described that is a problem for HSBC, I think that's precisely our advantage. This is CIBM generally. I wonder if we could take a question from Hong Kong.

Thank you, Stephen. Question in front.

Yes, Good morning. It's Nick Lord from Macquarie Two questions really on detail, just going back to your CIBM results and the big gains you made in the private equity book. Could you maybe comment just on sort of the relative size of your private equity book now versus the beginning of the year, are we still think about book grow, and its still ongoing grow the business? And secondly just on Mexico, I noticed that profits on the personal financial services that are actually down half on half. It seems to be driven by an increase in the above debt charge. Now, just wonder if you could give us some indication of the seasoning that you are seeing, you are seeing that book is down in line with expectations or is this something happened there that it is close about debt charge across than you are anticipating?

Nick, thank you. On the first question, on private equity in CIBM I guess in terms of --

We still have a fairly sizable portfolio and we still have an encouraging book of investments that looking... good prospects for the future. It's not something that we have grown dramatically over the last couple of years. It's something that we are beginning to put a little bit more into now and we will build up a bit from where we are. But it's still... it's probably round about the same size as it was but it's certainly not, it's not finished.

I think that other thing that I would add on that private equity investments is that they are very important to our client base in private banking line of business and as you will understand, many of our ultra high network private banking clients want access to good private equity investment opportunities and again, it goes back to a thing that we have just touched on, our distinctive calling guide is clearly the emerging market. We ought to be able to do private equity in places like China, India and elsewhere, better than anybody and that will be the focus of our efforts. On Mexico, Mike?

I just want to just add to what you said and things focus around our customers as well when we structure transaction we like to get a lay of private equity and our customers like to see us and this as well, so that's part of that. On Mexico, it is basically is seasonings particularly in the cards business. I mean, Mexico, is growing at the rapid rate and there is stiff competition in the market. It is always credit quality issues in fast growing markets and we are taking that seasoning, I don't see any thing on behold of the present time, but we watch all these markets very carefully and that's why we are getting the returns on those markets

Mike, thank you. Questions from --

I am Simon Willis from NCB. I have got three questions if I could. And the first one is on the U.S. sub-prime mortgage book. On the ARM resets, you indicate... you've indicated that H2 you now see the signs of the business to reset down to $5.4 billion and could you give an indication for '08, or as fine as you can now see. Secondly, on the tax rate, I wonder whether if you could perhaps give a slightly clearest idea for the full year tax rate in the here what Douglas said on the loan outlook for kind of disclose offsetting losses. But I think in the context we disclose the earnings growth, an ideal way where the tax rate might end will be actually quite important. And thirdly on the outlook for the U.S business, the question relates to credit appetite, growth in the first half has come in double-digits in cards, the prime mortgage growth has slowed and the question is really what lines do you principally see the growth coming in the state over the next one to two years, is the gross really in cards which I guess might be more vulnerable to rising impairment charge if the U.S economy slows materially from here or should we be thinking about the broader spread across the over board that including return of higher growth in prime mortgage area?

Simon, thank you. If I can make a general comment, but I would like Douglas to comment on the tax issue and ask Mike to comment on the business outlook for the U.S. market. The general comment is the obvious one, you've heard it from us before and I know you all appreciate it. We avoid giving forecasts and that goes for... on the credit tax rates, because they have indications for business and we avoid giving forecast and with that caveat we made some comments on the micro economic framework in the U.S, which by the way I do think is looking better now than it did kind of nine months ago. I think the issue of the prospect of the U.S recession I don't know whether it was a very high as probably receded. We are looking at growth of about 2% and employment remaining pretty robust and that kind of truly colors one's expectations. But Douglas do you want to say any thing on tax rate?

I'm certainly not going to indicate what I think it'd actually be for this year because it would I guess get into an indication of the mix in the second half. I think its probably fair to say that we would say that our normalized tax rate would be 24%, round about that. So clearly we are running consecutively lower than that.

But that's not the same as the forecast.

No that's a normalized and the second half of this year won't be normalized. But our normalized rate will be round about that.

On the ARM's reset, for next year it's about $4 billion, of which $3 billion is above is in the mortgage services element so that's it. I don't see the prime mortgages business growing. That will only be run through the branch network once we buy mortgage in that area and that would be in running down the prime mortgage book for sometime now. So and for the other businesses, yes credit cards will be a major force applicable; we don't see the charge-off of those getting out of hand, in the present time they are staying inside our models. First mortgages in the sub-prime market, fixed rate mortgages will continue and various other products around that wrapping insurance round those products etcetera will be there. And generally a consolidation of loan facilities or loan requirements against the mortgage will be there. But it... what I see coming is a repricing because there is a number of people out of the market now and I could see an opportunity to get pricing back into this so we are not being distracted by other products. So I think altogether and as I said, I think its $3 billion in the mortgage services for ARMs reset for next year and that's sort of focus here ongoing would sort it out.

Mike, thank you. Probably we have time of couple of more questions, I think we have one on the web at the back; I wonder if we could take that?

We have a question from Philip Vadahu of Tenco [ph]. We have seen dramatic repricing of credit growth in the past two to three weeks, this means higher spending cost for you too. DO you expect a substantial impact? This market appetite for credit risk and free fall, do you see risks associated with converted bridge loans? Do you anticipate issues with regards to undrawn credit lines?

Well, thank you Philip. We commented on this in Douglas's part of the presentation. Our own leverage buy businesses is... has been growing, but is still relatively small and as Douglas commented, the one or two positions that we got at the moment if they were to end up on our balance sheet because we couldn't distribute, we will be comfortable with the... we could easily absorb them on the balance sheet in the normal conditions and be very comfortable with the credit. In terms of pricing, Douglas?

In terms of pricing I don't think, I mean clearly as credit spreads widen there is both an opportunity for prospective business and some adjustment for businesses already written, but I wouldn't say that that we have a particular sensitivity to that issue, no.

We probably got time for couple of more questions; I mean one from here and one from Hong Kong. Yes, please. Derek Chambers - Standard & Poor's Equity Research: It's Derek Chambers from Standard & Poor's Equity Research. Could I ask two questions; one is your slide on page 29 on the breakdown of the U.S mortgage services portfolio, back to move stated income which I think it overlaps with some of the other categories, and I am not sure if you really discussed where you are seeing impairments or delinquency is going in that area. I think you did touch upon stated, you have no alternative exposure. Are the focus stated income might be regarded as, similar to that sales. Could you just comment on the trends in that segment, and could ask, I wonder if you could comment separately on offers here in the statement you say there is still proprietary you've got in the U.S. but is there anything you can say now that's going to effect?

If I may just quickly on part 2 first, because I think not a lot to be honest we are clearly dependent on what happens in the U.S. and how that works out until we find all rules issued for the advance approach, the impact on us is uncertain. I don't actually think it is going to terribly material that could be level, but the honest answer is we can't give you much more precision in that at this stage. We are on track to implement Basel II from the 1st of January next year, subject to the relevant regulatory approvals. On the delinquency trends on stated income products --

Brendan, you want to do it for us?

Yes, we've got Brendan who...Brendan McDonagh, who run the business in America for us. Brendan, wait for Mike, do you want to make any comments?

Yes, good afternoon or good morning. We are not seeing any increased delinquency in that area. In other words, whether it's the second leans ARMs or even in the stated income loans, to sort of levels of delinquency which we forecast or keeping basically with an expectations, and you can see the decreases are largely in line in terms of second leans coming in at 18%, maybe come down 20% about the same, as you bring the portfolios down across the whole spectrum of the loan types, and the results we nearly a comment about the sales vis-à-vis our collection practices. And a large portion of sales is actually performing loans. So, we still are sticking to our strategy that in most cases we'd can trust better because our experience in that business, where we can't trust better, we will not sell those loans.

Brendan, thank you. We probably have time for one final question from Hong Kong, Vincent?

Thank you, Stephen. Roy Ramos?

Roy Ramos with Goldman Sachs. Two follow-on questions sir, some request for additional color. First, you've actually continued to grow your branch-based mortgage loans with HSBC Finance, USA, including on a half-on-half basis. Am I right that these are sub-prime loans, and what is motivating this continued increase? Is the delinquencies are fairly stable, etcetera, etcetera? And then I guess, another following question I had was, your balance sheet management revenues which have also improved on a half-on-half basis. Could you give us a bit more colors to what is driving this? You mentioned it's mostly about Asia... it's mostly about the HIBOR situation here in Hong Kong, or is this the start of the broad-based recovery in the balance sheet management revenues for the Group as a whole? Thank you.

Roy, thank you for those two questions. On branch-based mortgage business in the U.S., Mike, let me turn to you.

Yes, I mean certainly yes, it is. It's been our sub-prime business in the United States. It is wrong to assume that everybody doesn't need a mortgage to live their lives. We underwrite those mortgages on individual basis through our branch network. The majority of them are first lean mortgages, and we are continuing to write that business, and certainly we are writing with a better spread now than we had before, we take same sort of guidance at looking at it as we do, and we are comfortable that we are writing good business.

And on balance sheet revenue, Stuart? Can we have a mic, thank you.

Thanks Roy, its actually Hong Kong dollars, so basically the curve in Hong Kong, but positive curve, so this revenue opportunities in Hong Kong and Hong Kong dollar curve and also the negative positions we have matured in run off. So, therefore what you conclude is that the PSM number should not continue to go down, but what you cannot extrapolate is it that it will continues... it will go up a lot from where it is now, because sterling, euros and U.S. dollar curves remain challenging. So, specifically, the run off of acquisitions in Asia and opportunities to actually make money out of the Honky curve.

Stuart, thank you. And I am afraid at that point we must draw discussion to a close. Ladies and gentlemen in Hong Kong, thank you for joining us this afternoon, I'm about to get onto a plane, so I will be with you and I will be meeting a number of you over the next 48 hours, Tuesday, Wednesday. Ladies and gentlemen, here in London, thank you for being with us. We look forward to seeing you again in the full year. Thank you.