FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of
the Securities Exchange Act of 1934
For the month of November, 2007
HSBC Holdings plc
42nd Floor, 8 Canada
Square, London E14 5HQ, England
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F).
Form 20-F X Form 40-F ......
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934).
Yes....... No X
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- ..............)
HSBC HOLDINGS PLC - PRE-CLOSE TRADING UPDATE
HSBC Holdings plc (HSBC) will be conducting a trading update conference call
with analysts and investors today to coincide with the release of its Pre-close
Trading Update and the third quarter results of its principal operations in the
United States (US), HSBC Finance Corporation and HSBC Bank USA Inc., whose
formal SEC 10-Qs will be available at Investor Relations on www.hsbc.com shortly
after 08.30 GMT. The trading update call will take place at 10.30 GMT, and
details for participating in the call and live audio webcast can be also found
at Investor Relations on www.hsbc.com and at the end of this statement.
The information that will be covered during the meeting relating to HSBC's
operating performance is as follows. Where reference is made to 'underlying
basis', comparative information has been expressed at constant currency and
adjusted for the effects of acquisitions and disposals. There have been no
material changes to the composition of the Group since the half-year.
Summary
HSBC's profit before tax in the third quarter of 2007 was ahead of the
equivalent quarter in 2006 ('prior year quarter') and so, following our improved
first half results, the Group's performance for the first nine months of 2007
was also ahead of the comparable period last year.
Underlying revenue growth in the third quarter was higher than in the first half
of the year; and underlying cost growth was moderately lower.
In Asia-Pacific and the Middle East, the excellent operating and financial
performance delivered in the first half of the year continued during the third
quarter. Europe, driven by the UK, was strongly ahead of the prior year quarter,
though Latin America was lower as a result of higher loan impairment charges in
Mexico.
Higher loan impairment charges in the US were more than offset by revenue growth
in the Group, with the result that net operating income* was higher than in the
prior year quarter.
The loan impairment charge in respect of our US Consumer Finance business was
US$3.4 billion in the third quarter of 2007. This charge was some US$1.4 billion
higher than would have been implied by extrapolating first half trends; of this
increment, some US$0.7 billion related to real estate secured credit with the
remainder largely due to branch unsecured loan and cards portfolios.
Deterioration in US housing markets is affecting consumer finance credit quality
more broadly than hitherto and loan impairment charges are expected to remain
high in these conditions. There is the probability of further deterioration if
the current housing market distress continues and further impacts the broader
economy.
Personal Financial Services (PFS), although adversely affected by conditions in
the US, was strongly ahead in Europe, Asia-Pacific and the Middle East.
Commercial Banking (CMB) and Private Banking performed ahead of the prior year
quarter, with encouraging evidence of additional revenues being delivered as a
result of stronger linkages within the Group.
In difficult market conditions, our global Corporate, Investment Banking and
Markets (CIBM) business delivered pre-tax profits broadly in line with the prior
year quarter. Write-downs of securities, credit trading and leveraged
acquisition financing positions were broadly offset by record revenues in other
CIBM businesses.
The Group has very little direct exposure to US sub-prime mortgage-backed
collateralised debt obligations (CDOs) and hence, since the end of the third
quarter, has not suffered the further significant write-downs of this asset
class disclosed by a number of other financial institutions.
The general market widening of credit spreads and liquidity premia experienced
in the quarter had a favourable effect on the valuation of the portion of the
Group's own debt that is carried at fair value. This is reflected as a gain in
the income statement in respect of items carried at fair value and included in
the 'Other' customer segment.
During the quarter, the Group generated capital to support balance sheet growth;
the Group's tier 1 and total capital ratios remained strong and essentially in
line with those disclosed at the half year.
The Group's performance summarised above, achieved in a period of turbulent
market conditions, reinforces the benefits of HSBC's strong and liquid balance
sheet and diversified revenue streams.
A more detailed commentary follows:
Continuing investment in the business
HSBC continued to pursue its stated strategy of rebalancing the earnings of the
Group with investment slanted towards emerging markets; of targeting selected
high-growth areas in developed markets; and using HSBC's unique international
distribution platform to build business and revenues from trade and investment
flows between emerging and developed markets.
In the third quarter, we concentrated our investment - both acquisitions and in
our own business - on emerging markets. We made a strategic investment in
insurance in Vietnam and, in India, we agreed to form an insurance joint venture
with two local banks; we were the first foreign bank to obtain the necessary
formal approvals to open a Rural Bank in mainland China; and we completed due
diligence on our proposed majority investment in Korea Exchange Bank, the
sixth-largest bank in South Korea, Asia's third-largest economy. Subsequent to
the quarter end, we became the first foreign bank to gain a licence to set up a
stand-alone Islamic Bank in Malaysia, and we reached agreement to extend our
insurance business in South Korea through a joint venture. We also sold a
non-core credit card portfolio in the UK.
World's leading international emerging markets bank
In our operations in Asia-Pacific and the Middle East and in most of our Latin
American businesses we continued to perform strongly. The growth of third
quarter pre-tax profits in our emerging markets businesses, compared with the
prior year quarter, exceeded the rate of progress achieved in the first half of
2007.
HSBC's performance continues to demonstrate our competitive advantages in
capturing revenue opportunities arising from the current strength of Asian
markets. In particular, our global reach enables us to secure business from both
sides of the trade equation and intermediate in investment flows between the
developed and developing world through our custody, funds administration and
investment services businesses.
Excellent performance in Hong Kong
HSBC's third quarter results in Hong Kong were excellent with retail brokerage,
funds income, insurance and deposit-related income all strong.
Leading international bank in mainland China
Within our operations in mainland China, we grew deposits strongly and
consequently boosted net interest income. Trade-related fees, commercial lending
and cash management activities all made significant contributions to revenue. We
also increased revenues from securities services, structured products and
treasury activities in buoyant equity markets, and benefited from the
progressive liberalisation of investment products.
Profit contributions from our strategic investments in Ping An Insurance, Bank
of Communications and Industrial Bank doubled compared with the prior year
quarter. In October, we increased our holding in Bank of Communications to 19
per cent. Our total investment in strategic associates in mainland China
currently has a market value of around US$40 billion.
Strength throughout Asia-Pacific
In other Asia-Pacific countries, encouraging performances continued in the third
quarter, particularly in the Group's operations in India, Singapore, Taiwan and
Indonesia.
Strong performance in the Middle East
In the Middle East, the benefits of a strong economy helped boost customer
demand for deposit products and the region continued to enjoy a benign credit
environment. Profit growth in the quarter, compared with the prior year quarter,
accelerated when compared to the growth rate achieved in the first half of 2007.
Restructuring our US business
Sound performances were achieved in our retail bank branches, our online deposit
offering and our credit card businesses, but PFS profits in North America were
significantly affected by rising loan impairment charges in real-estate secured
lending, and branch unsecured loan and cards portfolios.
We continued to run-off our Mortgage Services portfolio, albeit at a decreasing
rate, and we also took action to restructure the business in light of market
conditions. We remain committed to this course of action.
On 21 September 2007, we announced the closure of the Decision One broker
channel, which originated loans for onward sale. This contributed to a related
and significant contraction of the mortgage-backed trading operations of CIBM in
New York as part of a wider CIBM initiative to refocus on emerging markets.
Loan impairment charges in the third quarter in the US were higher than both the
preceding quarter and the prior year quarter. The general weakness now emerging
in US real estate has had the effect of significantly reducing the availability
of credit to non-prime customers. This, together with a lack of appetite from
purchasers of securitised retail mortgage-backed debt, has made refinancing more
difficult and contributed to illiquidity across most US housing markets. There
is also some evidence of changed customer behaviour as foreclosures increase,
repossessed properties remain unsold and rental alternatives become more
attractive. All of these factors are contributing to the increases in loan
delinquency now emerging in the branch-based real estate-secured consumer
lending business and in Mortgage Services. Early stage delinquency rates in both
cards and branch unsecured lending are also showing signs of deterioration.
This weakening in the US credit environment has led to a loan impairment charge
of US$3.4 billion in the US Consumer Finance business in the third quarter. This
charge was some US$1.4 billion higher than would have been implied by
extrapolating first half trends; of this increment some US$0.7 billion related
to real estate secured credit with the remainder largely due to branch unsecured
loan and cards portfolios.
At the end of the third quarter, US$1.6 billion (3.2 per cent) of mortgage
balances in our US branch-based consumer finance business were two or more
payments overdue, compared with US$1.1 billion (2.3 per cent) at 30 June 2007.
The comparable figures in Mortgage Services were US$3.2 billion (8.2 per cent)
and US$2.6 billion (6.2 per cent) of the portfolio, respectively.
At 30 September 2007, total loan impairment allowances held against US non-prime
real estate lending were US$3.4 billion compared with US$2.6 billion at the end
of June 2007. Loan impairment allowances held against the Mortgage Services book
rose by US$0.3 billion to US$2.4 billion while loan impairment allowances held
against real estate loans in the branch-based business were US$0.5 billion
higher at US$1.0 billion.
Loan impairment charges for credit cards, retail services and motor vehicle
lending in the US rose broadly in line with portfolio growth, mix and seasoning,
although the weakness in parts of the US economy, notably in housing and certain
manufacturing industries, continued to adversely affect certain customer
segments.
If US residential property values continue to fall, we would expect an
increasing and persistent trend in overall real estate-secured delinquency and
loan impairment charges, expressed both in dollars and as a percentage of the
portfolio. Also, the duration of the US non-prime real-estate secured portfolios
in our branch-based consumer lending business and in Mortgage Services would be
extended and the portfolios would suffer higher losses throughout their lives.
As we now expect more prolonged weakness in the US housing market, we have taken
steps to restrict the product range we offer, thereby eliminating the equivalent
of around 5 per cent of Consumer Lending loan originations measured on the basis
of gross revenue. It is now clear that, in such market conditions, the projected
flow of new business is no longer compatible with the scale of the current
Consumer Finance branch network. As a consequence, we have conducted a rigorous
appraisal of both the business and the physical infrastructure of our US
Consumer Finance operations. We are already in the process of closing or
consolidating 100 branches within our consumer-lending branch network across the
US, and plan to close a further 260 branches so that our distribution
infrastructure is better aligned with the level of forecast demand implied by
our credit underwriting risk appetite. This action will reduce the Consumer
Finance branch network to 1,000 branches. A restructuring charge of up to US$55
million caused by these planned closures is expected to be taken in the fourth
quarter of 2007.
Also in the fourth quarter, we will be making changes to fee and finance charges
on credit card services to improve our customer proposition. We estimate these
changes will reduce fee and finance charge income by between US$50 million and
US$60 million in the fourth quarter of 2007 and by between US$225 million and
US$250 million in 2008. We will also curb growth in customer loans and advances
in light of the anticipated slowing of the US economy and restrict credit line
increases and balance transfer offers. When we see the economy strengthening, we
will be able to resume growth.
Diversification and focus on emerging markets in CIBM
CIBM reported third quarter pre-tax profits broadly in line with the prior year
quarter, in spite of write-downs in credit trading and leverage acquisition
finance businesses totalling US$925 million. CIBM, which is increasingly focused
on emerging markets-led opportunities, earned just under half its revenues from
Asia in the third quarter.
The third quarter was an exceptionally difficult period in certain trading
markets as liquidity contracted across some asset classes. In particular,
structured credit products were adversely affected as investors withdrew from
asset-backed securities markets. Market illiquidity was exacerbated as banks
took into account contingent funding requirements arising from commercial paper
issuance and, potentially, from providing support to structured investment
vehicles (SIVs). During this period, HSBC attracted deposits and our commercial
surplus expanded strongly, particularly in Asia.
Credit spreads widened across non-government asset classes, contributing to
pre-tax write-downs of US$750 million on securities, including
wholesale-purchased sub-prime residential mortgages and structured credit
trading positions held on balance sheet, and US$175 million (net of fees) in
respect of non-syndicated committed facilities in the leveraged acquisition
finance business. Of these write-downs, some US$600 million arose in CIBM in New
York.
Within CIBM, wholesale-purchased sub-prime residential mortgages in the US not
yet securitised amounted to approximately US$2 billion at the end of the
quarter. The Group has very little direct exposure to US sub-prime
mortgage-backed CDOs.
Largely offsetting the write-downs, record quarterly revenues were achieved in
Foreign Exchange, Payments and Cash Management, Securities Services and Group
Investment Businesses.
CIBM's third quarter performance showed that its emerging markets-led and
financing focused strategy has produced resilient results in difficult
conditions by enabling it to benefit from strong emerging market investment
flows and trade volumes, and market volatility, which encourages client hedging
activity. In addition, the contraction in general market liquidity has boosted
HSBC's attractiveness to counterparties due to the Group's strong balance sheet.
In Group Investment Businesses, funds under management grew during the quarter
by US$18 billion and our emerging markets strength produced further performance
fees.
Balance Sheet Management revenues in the quarter remained in line with the
progress made in the first half of 2007. Gains from principal investments were
lower than the run rate achieved in the first half.
Conduits and SIVs
The Group's principal sponsored conduits, Solitaire, Bryant Park, Regency and
Abington Square, which are on-balance sheet under IFRSs, are funding
satisfactorily with no impairment of assets. The two off-balance sheet SIVs
managed by HSBC, Cullinan and Asscher, also currently have requisite funding
arrangements in place. In our capacity as managers of the SIVs, we actively
continue to work with the income note and senior note holders during this period
of market disruption. Asset quality within the SIVs remains high although two
financial institution issuers of assets held by the SIVs were downgraded
subsequent to the quarter end.
Strong performance in CMB
CMB's pre-tax profits in the third quarter compared favourably with the prior
year quarter, and were in line with growth achieved in the first half of 2007.
Increases in revenue were driven by higher deposits in Hong Kong and mainland
China and strong lending growth in the UK. The business benefited from
significant increases in the volume and value of inter-regional referrals from
within HSBC.
Credit spread impact on the fair value of our own debt
The general widening of credit spreads and liquidity premia that contributed to
the write-down of positions in CIBM had a favourable effect on the valuation of
the portion of the Group's own debt that is carried at fair value. To some
extent this acted as a counterbalance to credit spread widening on the Group's
trading positions and reflected the accounting benefit of having raised debt at
spreads no longer achievable in current market conditions. In the third quarter,
the favourable impact of this fair value accounting contributed US$1.3 billion
to pre-tax profits. This benefit is mainly accounted for within 'Other' and
therefore is not allocated to customer groups and global businesses.
Credit environment broadly stable outside the US
Outside the US, credit performance in the third quarter remained favourable
compared with historical trends, except in Mexico where the expected impact from
the seasoning of recent growth in the loan book added to loan impairment
charges, as signalled at the interim stage.
In the UK, encouragingly, credit trends in the personal business showed signs of
improvement in the third quarter, reflecting underwriting changes made in the
last two years.
Our credit appetite in many markets remains selective in light of elevated asset
price growth relative to underlying income growth.
Taxation and other matters
The Group's effective tax rate in the third quarter was lower than in recent
years, primarily due to the considerably higher contribution from Hong Kong to
the Group's profits in the quarter and adjustment to certain temporary deferred
tax timing differences.
The gain on sale of the Group's headquarters building at 8 Canada Square remains
unrecognised in the Group's financial performance.
Outlook
It is particularly difficult to assess the outlook for the rest of the year and
into 2008.
In spite of the severity of the housing market downturn, US annualised economic
growth in the third quarter was 3.9 per cent, considerably higher than the
market consensus. This partly reflected a significant improvement in the
country's trade balance, with US exports boosted by a combination of continued
strength in emerging markets and the weak US dollar. Risks to continuing
economic growth exist in the event of a prolonged weakness in the US housing
market, which remains our main area of concern. In the absence of general
confidence in a housing market upturn, this would lead to continuing high levels
of loan impairment charges.
The strength of Asian and Middle Eastern economies and financial markets looks
sustainable in the near term as domestic and regional growth continues at a
rapid pace. Increasing trade between Asia and Latin America and increasing
investment into the West from the Middle East, India and China provide
attractive business opportunities for HSBC at both ends of the flows.
In terms of market risk, extreme volatility in traded markets driven by a
liquidity shock remains more than a remote possibility, with adverse
consequences for the valuation of all risk and trading positions. The
de-leveraging of the financial system now underway, however, plays to the
strength of a strongly capitalised, liquid and well-diversified Group like HSBC.
HSBC remains fully committed to its principles of capital strength and
liquidity. This commitment enables us to support our customers and respond
flexibly to challenging market conditions and opportunities as they arise.
HSBC's results for the year ending 31 December 2007 will be announced on Monday
3 March 2008.
Conference call details
The conference call is being hosted by Michael Geoghegan, Group Chief Executive,
and Douglas Flint, Group Finance Director, and will be accessible by dialling
the following local telephone numbers:
UK: +44 20 7019 0812
UK toll free: 0800 018 0795
USA: +1 210 795 0472
USA toll free: 877 818 6787
Hong Kong: +852 2286 5632
Hong Kong toll free: 800 964 136
Restrictions may exist when accessing freephone/toll free numbers using a mobile
telephone.
Passcode: HSBC
A recording of the conference call will be available from the close of business
14 November 2007 until close of business on 14 December 2007.
Local replay access telephone numbers are:
UK toll: +44 20 7192 0843
UK toll free: 0800 279 5528
USA toll: +1 203 369 4975
USA toll free: 1 866 855 8654
Hong Kong: +852 2802 5151
Replay access passcode: 369682
On 15 November 2007, the replay will also be accessible on HSBC's website by
following this link: http://www.hsbc.com/hsbc/investor_centre.
Footnote
* Net operating income is total operating income after deduction of net
insurance claims incurred and movement in policyholders' liabilities, and loan
impairment charges and other credit risk provisions.
Notes to editors:
1. HSBC Holdings plc
HSBC Holdings plc serves over 125 million customers worldwide through around
10,000 offices in 83 countries and territories in Europe, the Asia-Pacific
region, the Americas, the Middle East and Africa. With assets of some US$2,150
billion at 30 June 2007, HSBC is one of the world's largest banking and
financial services organisations. HSBC is marketed worldwide as 'the world's
local bank'.
2. An interview with Michael Geoghegan, Group Chief Executive, and Douglas
Flint, Group Finance Director, is now available in video/audio and text on
www.hsbc.com and www.cantos.com.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HSBC Holdings plc
By:
Name: P A Stafford
Title: Assistant Group Secretary
Date: 14 November 2007