180811 Annual Report 2010 Hsbc Pbsu Holdings

Annual Report 2010 HSBC Private Banking Holdings (Suisse) SA

Introduction to the private bank 3

Our awards 4

Letter from the Chairman 6

Letter from the Chief Executive Officer, Global Private Banking 8

Review of operations of HSBC Private Banking Holdings (Suisse) SA 10

Board of Directors 14

Financial statements 16

Report of the statutory auditor 86

Financial highlights of HSBC Holdings plc 87

HSBC Private Bank office locations worldwide 90

Table of contents

“We search out and reveal new opportunities for our clients to manage and protect their wealth.”

Annual Report 2010 HSBC Private Banking Holdings (Suisse) SA3

Connecting with our clients

At HSBC Private Bank we search out and reveal new opportunities for our clients to manage and protect their wealth. As a leading international private bank, we build on the strengths, heritage and prudent long-term strategy of the HSBC Group.

Our offering is broad and global in reach. With over 90 offices in nearly 40 countries and territories, our network combines global expertise with a real understanding of local markets, issues and opportunities.

From our global platform we offer a service that is truly individual. We understand how to make international connections tangible for our clients. Our scale and reach mean our relationship managers can access new investment opportunities across our Group’s entire worldwide network.

For us, being global is less about size; it is more about insight. Our people join us from all over the world, so we can best serve our clients’ diverse needs. And being local is not just about geographical proximity. It is about developing close relationships with each other and our clients. By finding local answers, we make the complex and international feel accessible and personal.

In short, we connect our clients’ wealth to the world.

Introduction to the private bank

Our awards4


Connecting our clients’ wealth to opportunities around the world has been at the heart of our business philosophy over the past year – and with considerable success.

We are delighted that our commitment to our clients has resulted in many industry awards. These awards recognise our excellence in client service, founded on a sound business strategy and strength in execution; an excellence that has seen us through difficult market conditions and places us firmly among the world’s leading private banks.

We were named “Best Global Wealth Manager” in the Euromoney Awards for Excellence 2010. “Perhaps the hardest challenge for wealthy clients since April 2009 has been where to invest their money,” Euromoney explained in its widely-read magazine in July 2010. “Nervous of volatility in the equity markets and uninspired by returns on cash, the wealthy have been seeking new ideas. HSBC Private Bank wins this year’s award for best global wealth manager because it has helped them find opportunities. The bank has strived to offer clients alternative means of investing in real estate, distressed assets and hedge funds, and returns have not disappointed.”

We also won several major awards in the Euromoney Private Banking Survey 2010, including “Best Private Bank in Asia”, “Best Private Bank in the Middle East”, “Best Relationship Management globally” and “Best Trust Services globally”. Overall, we were ranked as the number two private bank globally.

In the Private Banker International Awards 2010 we were named the number one “Outstanding Private Bank in the Middle East”. We also performed strongly in other key areas. Reflecting our pedigree as a truly global private bank, we were finalists in the categories “Outstanding Private Bank - Asia Pacific” and “Outstanding Private Bank - Latin America”.

At the Global Private Banking Awards 2010 – produced by FT Global Events and supported by The Banker and Professional Wealth Management magazines – we were declared “Best Private Bank in the Middle East” and “Best Private Bank in Hong Kong”.

Stuart Gulliver

Letter from the Chairman

hsBC Private Banking holdings (suisse) sA and its subsidiaries are 100% indirectly owned by hsBC holdings plc

HSBC Private Banking Holdings (Suisse) SA

HSBC Private Bank (Suisse) SA Geneva Headquarters

Branches ZurichLuganoGstaad Guernsey Hong Kong SAR Singapore

HSBC Private Bank(Monaco) S.A. (C.I.) Limited (UK) Limited

Luxembourg S.A.

HSBC Holdings plc

HSBC Bank plc

2010 was a year when the global economic recovery took hold, led once again by strong growth in the emerging markets, especially Asia. In this environment, as a globally connected bank with a growing presence across the world’s faster-growing regions, combined with our continued conservative management of the balance sheet, HSBC achieved improved financial performance in 2010 and a strengthened capital position.

As Group Chief Executive, my clear objective is to deliver sustainable long-term value for shareholders consistently in a manner that maintains the confidence of all other key stakeholders in our businesses including depositors, counterparties, long-term creditors, customers, employees, regulators and governments.

Everything we do is governed by the imperative of upholding HSBC’s corporate reputation and character at the highest level and adding further strength to our brand. It is regrettable that a number of weaknesses in regulatory compliance, particularly in the US, were highlighted in 2010 and we are resolved to remedy these and reinforce the high standards we demand of ourselves.

hsBC Group

Underlying financial performance continued to improve in 2010 and shareholders continued to benefit from HSBC’s universal banking model. All regions and customer groups were profitable, as Personal Financial Services and North America returned to profit.

Profit before tax improved year on year. On a reported basis, profits increased by nearly USD 12 billion from USD 7.1 billion to USD 19 billion. On an underlying basis, profits increased by 36%, or almost USD 5 billion, from USD 13.5 billion to USD 18.4 billion.

The cost efficiency ratio rose to 55.2%, which is above our target range and unacceptable in my view. The causes were constrained revenues and, in part, investment in strategic growth initiatives across the business together with higher staff costs. It additionally reflected some one-off costs, but it is clear that we need to re-engineer the business to remove inefficiencies.

Return on average total shareholders’ equity rose from 5.1% to 9.5%, reflecting increased profit generation during the year. HSBC continued to grow its capital base and strengthen its capital ratios further. The core tier 1 ratio increased from 9.4% to 10.5%, as a result of capital generation and lower risk-weighted assets.

Private Banking

Global Private Banking delivered a resilient performance in a business environment that remains challenging for the private banking industry.

The contribution to Group pre-tax profits from Private Banking, of which HSBC Private Banking Holdings (Suisse) SA is the principal component, decreased by 5% with pre-tax profits in 2010 of USD 1,054 million. Asia and the Americas performed strongly, details of which are contained in the Chief Executive Officer’s Letter. HSBC Private Banking Holdings (Suisse) SA posted a pre-tax profit of USD 918 million, a decline of 14.5% over 2009.

Following an investigation into the data theft that occurred in 2006-07, the Swiss Financial Market Supervisory Authority (FINMA) on 28 February 2011 has criticised deficiencies in the internal organisation and controls of the bank’s IT activities and has requested that HSBC complete the measures already initiated to restore a state of compliance. Over the past 12 months we have conducted a comprehensive review of our information security procedures, formulated and continued to implement major security upgrade programmes, and continue a multi-million Swiss franc investment programme to ensure industry-leading security standards. We have also reviewed and strengthened risk management and operational controls and will continue to invest in these areas.

Outlook

In the short-term, risks to global growth remain, not least from an elevated oil price. We therefore expect cyclical volatility to continue – including in emerging markets – and progress is unlikely to be linear. In the longer-term, we believe that growth rates in many Western markets will continue to significantly underperform those of the emerging world.

The global economy’s structural position still requires fundamental readjustment as many Western economies must still deal with a large overhang of household and government debt, and weak growth and high unemployment will make this a slow and painful process. As faster-growing nations seek to limit the effect of Western

monetary policy on their own economies, we cannot discount the risk of increased tension over exchange rate and trade issues.

HSBC’s balance sheet remains strongly positioned to benefit from future interest rate rises. Whilst low rates may constrain income growth in the near-term, maintaining a conservative liquidity position is core to our proposition and to our funding strength. We also fully recognise the importance of ever more robust cost management discipline and the need to continue re-engineering the business to improve efficiency.

The private banking industry faces challenges on the regulatory, economic and competitive fronts. Persistent low interest rates are impacting net interest income, regulatory pressures are forcing the offshore model to adapt as well as raising compliance costs, and competition for experienced bankers remains acute. However, wealth creation continues to be strong in the emerging markets and client risk appetite has improved. With its scale and diversity combined with HSBC’s brand strength and unique positioning in faster- growing markets, HSBC Private Bank is well positioned to remain a competitive force in international private banking and a core part of HSBC’s wealth management strategy.

On behalf of the Board of Directors Stuart Gulliver Chairman of the Board of Directors HSBC Private Banking Holdings (Suisse) SA

Geneva, 22 March 2011


Letter from the Chief Executive Officer, Global Private Banking


Christopher Meares

In 2010, the business environment continued to be challenging for the private banking industry. This environment was dominated by historically low interest rates and economic uncertainties in some of the world’s developed countries experiencing severe fiscal constraints. Risk appetite did improve among investors, although these uncertainties created periods of “risk on, risk off”. On the positive side, emerging markets, and those with natural resources supplying the faster growing markets, experienced strong economic growth and related wealth creation, especially in Asia and Latin America. Furthermore, corporate balance sheets were relatively strong and encouraged a pick-up in fixed investment.

Against this backdrop, Global Private Banking, of which HSBC Private Banking Holdings (Suisse) SA is the principal component, generated a pre-tax profit of USD 1,054 million, compared with USD 1,108 million in 2009, a 5% decrease. Before the share of associates, pre-tax profit was flat compared to last year. Non-interest income (fees and commission) showed a strong improvement, rising by 7% as client trading and asset values picked up, and offsetting a 9% decline in net interest income due to compression in deposit margins. Total operating expenses rose by 8%, reflecting the increase in staff costs from additional hiring for the Asian, Latin American and Middle Eastern markets, the increase in IT spending and consultancy costs related to improvements in systems and information security, and higher compliance costs resulting from the evolving regulatory environment.

HSBC Private Banking Holdings (Suisse) SA posted a pre-tax profit of USD 918 million, a decline of 14.5% compared to 2009 (USD 1,074 million), with growth in the Asian branches offset by lower profits in Europe where lower net interest income had a greater impact. The resilient financial performance enabled HSBC Private Banking Holdings (Suisse) SA to pay a dividend of USD 930 million to the parent company whilst maintaining exceptionally strong capital ratios and liquidity.

Global Private Banking’s total client assets, which include trustee assets, increased by 8.5% to USD 499 billion as a result of a continuing recovery in the financial markets and strong net new money inflows of USD 13.1 billion, especially from the emerging market operations.

Turning to the regional performance of Global Private Banking’s business:

Asia – business improved with pre-tax profit rising 7% to USD 308 million. Net new money inflows were particularly strong as Asian economies picked up and markets were buoyed by strong IPO activity. Our Private Wealth Solutions, or Trust business, saw further growth on the back of increasing demand for succession planning. As part of a recently approved Strategic Plan, a front-office hiring programme was successfully launched, with the investment expected to sustain business growth in the future years.

Americas – pre-tax profits recovered strongly as a result of increased client investment activity and improved interest margins. Furthermore, we experienced some recoveries of prior impairment charges and no repeat of the fraud-related loss in 2009. The Latin American businesses experienced positive net new money inflows.

Europe and the Middle East – this region produced, before the share of associates, a pre-tax profit of USD 641 million, a decrease of 25%. Some resilient performances throughout the region, including a recovery in profits in France, were offset by a decline in Switzerland largely due to several factors: lower net interest income; an increase in staff and professional costs related to the handling of the data theft; an increased investment in systems and information security; and increased compliance- related costs. The region experienced positive net new money inflows in 2010, with the Middle East being the main contributor.

In line with HSBC’s strategy, Global Private Banking continues to focus on the following key initiatives:

Developing our domestic private banking operations in emerging markets where HSBC has a strong brand presence and wealth is being created by entrepreneurs.

Building on the strong business ties with other client groups, including the launch of a Family Office Partnership with Global Banking and Markets to offer the full spectrum of HSBC services worldwide to the major business owners of large corporates.

Using our Private Wealth Solutions (PWS) business, one of the largest trust and estate planning businesses in the world, to help entrepreneurs and wealth creators plan for succession issues.

Increasing our investment in IT platforms to improve the client experience and achieve synergies across Global Private Banking.

Some of the highlights of the year were:

Inward referrals from Commercial Banking, Personal Financial Services and Global Banking and Markets generated a record net new money inflow of USD 8 billion for Global Private Banking.

Our alternatives business grew with the return of client appetite for hedge funds and asset values increasing, and the successful conclusion of two major real estate club deals for ultra high net worth investors seeking value in the US real estate market. Our hedge fund platform was also ranked number 2 in the June 2010 Hedge Fund Intelligence Survey.

We received a number of industry awards over the last year, with the most notable achievement being the receipt of the Best Global Wealth Manager award by Euromoney at their Awards for Excellence 2010. Other top awards are detailed in the Awards page of this report.

In line with the Group’s detailed sustainability agenda, we have integrated within our business strategy a focus on sustainable investments, philanthropy, carbon footprint management and community involvement. In Switzerland, a very successful “Team Up 4 Tomorrow” initiative celebrated its fifth year of operation, with community investment programmes spread over four days in 23 locations. In London, over 200 employees of the Private Bank enrolled in a number of similar community projects over the year, including a successful money management mentoring programme with a local school.

Finally, I would like to thank our clients, who have been hugely loyal to HSBC Private Bank in 2010, and to give full recognition to all our employees for their hard work, dedication and team spirit, which helped to make 2010 a success despite the challenges that had to be overcome.

Christopher Meares Chief Executive Officer, Global Private Banking


Review of operations of hsBC Private Banking holdings (suisse) sA

Financial results

The annual accounts of HSBC Private Banking Holdings (Suisse) SA (“the Company”) were prepared under the International Financial Reporting Standards (IFRS) and contain a description of significant differences with the Swiss generally accepted accounting principles (Swiss GAAP) on page 85.

At 31 December 2010, the Company comprised the following principal banking and trust subsidiaries: HSBC Private Bank (Suisse) SA, including its branches in the Hong Kong SAR, Singapore, Guernsey and Gstaad, and its subsidiary, HSBC Private Bank (Luxembourg) S.A. and HSBC Guyerzeller Trust Company AG; HSBC Private Bank (Monaco) S.A., HSBC Private Bank (UK) Limited and HSBC Private Bank (C.I.) Limited.

Net profit after taxes for the year 2010 was USD 747.3 million, compared with USD 903 million for 2009, a decrease of 17%. Return on average total shareholders’ equity for 2010 was 11.7%, compared with 16.0% for 2009. Total shareholders’ funds at 31 December 2010 and 2009 were USD 6.8 billion and USD 6.7 billion respectively. The ratio of capital to risk-adjusted assets (one of our regulators’ measures for safety and soundness) was 17.7% and 14.8% at 31 December 2010 and 2009 respectively.

The tier 1 ratios of 17.7% and 14.8% at 31 December 2010 and 2009, respectively, were well above the regulatory minimum of 4%.

The international credit rating agencies Standard & Poor’s, Fitch IBCA and Moody’s, rated the Company’s long-term counterparty risk as AA, AA and A1, respectively. Our short-term ratings were A-1+, F1+ and P-1, respectively, the highest ratings awarded.

Total client assets, on and off-balance sheet, were USD 252.4 billion at 31 December 2010, an increase of 7% over USD 241.2 billion at 31 December 2009 due to market appreciation and net new money inflow from clients during 2010 of USD 8.2 billion (net new money outflow of USD 10.7 billion in 2009). This inflow was due primarily to our concerted effort to invest in the emerging markets through the hiring of relationship managers dedicated to those regions and the HSBC brand strength.

Net interest income was USD 1,059 million for the year ended 31 December 2010 compared with USD 1,202 million in 2009, a 12% decrease. The lower net interest income was due to a tightening of spreads on deposits during the year and by the lower average interest rates obtained on the redeployment of maturing investments.

Net fee income for 2010 was USD 886 million compared with USD 864 million in 2009, a 3% increase from 2009. The return of client risk appetite, the strength of the product offering and the increase in client assets under management led to this growth.

Net trading income in 2010 was USD 384 million compared with USD 330 million in 2009, a 16% increase, related primarily to the increase in brokerage on securities transactions and higher foreign exchange trading.

The gains from financial investments were USD 23 million in 2010 compared with losses of USD 46 million in 2009. The net differential between the two years related primarily to the technical gain in 2010 (write-down in 2009) on certain restricted shares owned by the Company but to be distributed to the employees of the Company and its subsidiaries.

Other operating income was USD 4 million in 2010 compared with USD 36 million in 2009. The lower amount was due to the sale of two buildings in Switzerland during 2009.

Loan and impairment provisions were stable at USD 31 million in 2010 versus USD 29 million in 2009.

Operating expenses were USD 1.4 billion in 2010 compared with USD 1.3 billion in 2009. This 9% increase reflects the hiring of front office staff to cover emerging markets as part of a long-term strategy to further strengthen the Company’s international network, along with investment in systems and higher compliance costs resulting from the evolving regulatory environment. The overall number of employees increased to 4,867 at 31 December 2010 compared with 4,759 in 2009.

Profit after taxYear ended 31 December, in USD millions

2010747.32009903.0

Client assetsAt 31 December, in USD billions

Client deposits 201079.0

Client deposits 200983.3

Client portfolio assets 2010173.0

Client portfolio assets 2009157.9

A. Leigh Robertson


Review of operations of HSBC Private Banking Holdings (Suisse) SA

The liquidity of the Company’s consolidated balance sheet continued to be a major strength. Deposits with banks and bonds, issued or guaranteed by governments and highly rated institutions, comprised 61.4% of total balance sheet assets. Loans and advances to customers at 31 December 2010 totalled USD 33.1 billion, representing 34.8% of total balance sheet assets, against which collective and individual impairment allowances of USD 115.3 million have been made.

Overall performance in 2010 was resilient compared to the financial environment that the Company was operating in. The outlook for 2011 will be challenging. That said, HSBC Private Bank is well positioned given the diversity of its earnings and reach, as well as being part of the HSBC Group.

A. Leigh RobertsonChief Financial Officer HSBC Private Banking Holdings (Suisse) SA Global Private Banking


Financial highlights

USD 000 (except employee data) 2010 2009

For the year ended 31 December

Profit after tax 747,278 902,960

At year-end

Total assets 95,105,628 96,531,371

Total client assets 252,431,164 241,153,648

Total equity attributable to shareholders of the parent company 6,787,598 6,641,064

Number of employees 4,867 4,759

s&P Moody’s Fitch IBCA

2010

Ratings at 31 December

Counterparty credit ratings AA A1 AA

Bank deposit ratings A-1+ P-1 F1+


Board of Directors

Stuart T. Gulliver Director and Chairman since 25 February 2010

Group Chief Executive from 1 January 2011 and executive Director of HSBC Holdings plc; Chairman, Europe, Middle East and Global Businesses until 31 December 2010. Chairman of HSBC Bank Middle East Limited from 15 February 2010 to 31 December 2010. Chairman of HSBC France. Chairman of The Hongkong and Shanghai Banking Corporation Limited from 1 January 2011. Deputy Chairman and a member of the Supervisory Board of HSBC Trinkaus & Burkhardt AG. Chairman of HSBC Bank plc from 21 April 2010 to 31 December 2010.

Peter Widmer Vice-Chairman

Counsel (former Senior Partner) of Homburger AG, Zurich. Chairman of the Board of HSBC Private Bank (Suisse) SA. A member of the Board of Careal Holding AG and AMAG Automobil- und Motoren AG.

Zarir J. Cama Director since 25 February 2010

Group General Manager of HSBC Holdings plc, Group Management Office. A Director of HSBC Global Resourcing (UK) Limited, HFC Bank Limited (UK), HSBC Bank Bermuda Limited and The Saudi British Bank.

Indu Chandaria Director

Chief Executive of Compagnie pour Assistance Technique et Investissements SA.

Michel Elia Director

A Director of HSBC Private Bank (Monaco) SA.

André Kudelski Director

A Director, Chairman and Chief Executive Officer of Kudelski SA. A Director of the Edipresse group, Nestlé SA and Dassault Systèmes (France) and Vice-Chairman of the Board of Directors of the Swiss-American Chamber of Commerce.

Christopher Meares Director

Group General Manager of HSBC Holdings plc. Chief Executive Officer of HSBC Global Private Banking. Chairman of HSBC Private Bank (UK) Limited, HSBC Private Bank (Monaco) SA and HSBC Alternative Investments Limited. A Director of HSBC Private Bank (Suisse) SA. Ceased to be a Director of HSBC Bank Middle East Limited on 31 December 2010.

Sieghardt Rometsch Director

Chairman of the Supervisory Board of HSBC Trinkaus & Burkhardt AG. Chairman of the Supervisory Board of University Clinic of Dusseldorf.

David Shaw Director

Lawyer (England and Hong Kong SAR), former Partner of Norton Rose. Adviser to the Board of HSBC Holdings plc since 1998. A Director of HSBC Bank Bermuda Limited and an independent non-executive director of Kowloon Development Company Limited and Shui On Land Limited.

The following directors resigned during 2010: Stephen K. Green (former Chairman until 25 February 2010), Adrian H. C. Fu (Director until 19 July 2010), and Youssef A. Nasr (Director until 25 February 2010).

secretary to the Board

Hervé Cherix

supervision and regulation

By virtue of HSBC Holdings plc’s ownership interest in HSBC Private Banking Holdings (Suisse) SA, certain supervisory responsibilities of the Financial Services Authority (FSA) in the United Kingdom extend indirectly to HSBC Private Banking Holdings (Suisse) SA. The FSA exercises consolidated prudential supervision over the HSBC Group. Local bank regulators oversee the subsidiaries’ compliance with local laws, regulations and banking practices. As HSBC Private Banking Holdings (Suisse) SA is the management centre for HSBC Private Banking activities, the Swiss Financial Market Supervisory Authority has elected to exercise consolidated supervision over the Company.

14Annual Report 2010 HSBC Private Banking Holdings (Suisse) SA

15

Notes UsD 000 UsD 000 ChF 000 ChF 000

2010 2009 2010 2009

Interest income 1,408,063 1,720,159 1,459,721 1,861,377

Interest expense (348,921) (517,752) (361,722) (560,257)

Net interest income 1,059,142 1,202,407 1,097,999 1,301,120

Fee income 1,048,991 1,004,556 1,087,475 1,087,026

Fee expense (162,558) (140,277) (168,522) (151,793)

Net fee income 886,433 864,279 918,953 935,233

Net trading income 383,638 329,961 397,713 357,049

Gains less losses from financial investments 22,805 (46,443) 23,642 (50,256)

Dividend income 2,912 7,892 3,019 8,540

Other operating income 4,142 35,892 4,294 38,839

Total operating income before loan impairment charges and other credit risk provisions 2,359,072 2,393,988 2,445,620 2,590,525

Loan impairment charges and other credit risk provisions (31,171) (29,244) (32,315) (31,645)

Net operating income 2,327,901 2,364,744 2,413,305 2,558,880

Employee compensation and benefits 4 (923,352) (879,133) (957,227) (951,306)

General and administrative expenses 5 (456,335) (379,992) (473,077) (411,188)

Depreciation of property and equipment 16 (29,654) (30,626) (30,742) (33,140)

Amortisation of intangible assets and impairment of goodwill 15 (580) (977) (601) (1,057)

Total operating expenses (1,409,921) (1,290,728) (1,461,647) (1,396,691)

Operating profit 917,980 1,074,016 951,658 1,162,189

Profit before tax 917,980 1,074,016 951,658 1,162,189

Tax expense 7 (170,702) (171,056) (176,965) (185,099)

Profit for the year 747,278 902,960 774,693 977,090

Profit attributable to shareholders of the parent company 736,807 891,361 763,838 964,539

Profit attributable to non-controlling interests 10,471 11,599 10,855 12,551

Consolidated statement of comprehensive incomefor the year ended 31 December 2010

UsD 000 UsD 000 ChF 000 ChF 000

2010 2009 2010 2009

Profit for the year 747,278 902,960 774,693 977,090

Other comprehensive income

Available-for-sale investments:

Fair value gains/(losses) (128,784) 612,092 (133,509) 662,342

Fair value losses transferred to income statement on disposal 164,014 234,284 170,031 253,518

Amounts transferred to the income statement in respect of impairment losses 4,905 50,051 5,085 54,160

Income taxes 12,320 (108,817) 12,772 (117,750)

Cash flow hedges:

Fair value gains 17,855 18,871 18,510 20,421

Fair value (gains)/losses transferred to income statement (11,597) 19,379 (12,022) 20,970

Income taxes (835) (3,337) (866) (3,611)

Actuarial gains/(losses) on defined benefit plans:

Before income taxes (36,552) 108,668 (37,893) 117,589

Income taxes 10,512 (23,602) 10,898 (25,540)

Exchange differences 317,201 255,516 (228,890) 3,065

Other comprehensive income for the year, net of tax 349,039 1,163,105 (195,884) 985,164

Total comprehensive income for the year 1,096,317 2,066,065 578,809 1,962,254

Total comprehensive income for the year attributable to:

Shareholders of the parent company 1,086,220 2,065,180 570,670 1,959,385

Non-controlling interests 10,097 885 8,139 2,869

Financial statements Consolidated income statement for the year ended 31 December 2010


Consolidated cash flow statementfor the year ended 31 December 2010


2010 2009 2010 2009

Cash flows from operating activities

Profit before tax 917,980 1,074,016 951,658 1,162,189

Adjustments for:

Non-cash items included in profit before tax 26 53,091 67,098 55,038 72,606

Change in operating assets 26 850,365 11,373,078 881,514 12,306,808

Change in operating liabilities 26 (1,549,833) (3,552,175) (1,606,713) (3,843,809)

Elimination of exchange differences and other adjustments – – 259,786 (1,131,970)

Net gain from investing activities (27,645) (22,701) (28,659) (24,565)

Contribution paid to defined benefit pension schemes 4 (63,781) (35,522) (66,121) (38,438)

Tax paid (223,317) (174,169) (231,510) (188,468)

Net cash from operating activities (43,140) 8,729,625 214,993 8,314,353

Cash flows (used in)/from investing activities

Purchase of financial investments (32,618,582) (44,638,933) (33,815,328) (48,303,789)

Proceeds from sale and maturity of financial investments 32,528,940 37,237,178 33,722,330 40,294,349

Purchase of property and equipment 16 (38,817) (22,159) (40,241) (23,978)

Proceeds from sale of property and equipment 16 775 29,988 803 32,451

Purchase of goodwill and intangible assets 15 (257) – (266) –

Net cash outflow from acquisition of and increase in stake of subsidiaries – (350,000) – (378,734)

Net cash flow from disposal of subsidiaries (82) 5,306 (85) 5,742

Net cash used in investing activities (128,023) (7,738,620) (132,787) (8,373,959)

Cash flows used in financing activities

Dividends paid to shareholders (930,000) – (1,058,061) –

Dividends paid to non-controlling interests – (19,000) – (20,560)

Net cash used in financing activities (930,000) (19,000) (1,058,061) (20,560)

Net increase/(decrease) in cash and cash equivalents (1,101,163) 972,005 (975,855) (80,166)

Cash and cash equivalents at 1 January 14,907,512 14,985,420 15,339,831 15,966,965

Effect of exchange rate changes on cash and cash equivalents 55,792 (1,049,913) (1,423,668) (546,968)

Cash and cash equivalents at 31 December 26 13,862,141 14,907,512 12,940,308 15,339,831

Consolidated balance sheetat 31 December 2010


2010 2009 2010 2009

Assets

Cash and balances at central banks 658,495 97,268 614,705 100,089

Items in the course of collection from other banks 656 5,588 612 5,750

Trading assets 10 462,741 450,546 431,969 463,612

Derivatives 11 1,038,365 1,081,160 969,314 1,112,514

Loans and advances to banks 21 10,476,359 20,399,181 9,779,681 20,990,758

Loans and advances to customers 21 33,136,911 29,370,509 30,933,307 30,222,254

Financial investments 13 47,248,411 43,886,319 44,106,392 45,159,022

Financial investments which may be repledged or resold by counterparties 13 718,598 – 670,811 –

Other assets 18 457,254 410,837 426,846 422,750

Current tax assets 18 1 3,773 1 3,882

Prepayments and accrued income 393,661 329,362 367,483 338,913

Interests in associates 1,241 1,126 1,158 1,159

Goodwill and intangible assets 15 308,201 307,406 287,706 316,321

Property and equipment 16 190,331 172,956 177,674 177,972

Deferred tax assets 7 14,403 15,340 13,445 15,785

Total assets 95,105,628 96,531,371 88,781,104 99,330,781

Liabilities and equity

Liabilities

Deposits by banks 21 4,186,697 2,767,527 3,908,281 2,847,785

Customer accounts 21 81,922,384 84,872,508 76,474,545 87,333,811

Items in the course of transmission to other banks 34,811 4,051 32,496 4,168

Derivatives 11 1,259,613 1,275,588 1,175,849 1,312,580

Debt securities in issue 21 – 21 – 22

Other liabilities 19 282,494 292,962 263,710 301,458

Current taxation 75,170 122,017 70,171 125,555

Accruals and deferred income 402,672 423,424 375,894 435,704

Provisions 20 45,240 26,134 42,232 26,892

Deferred tax liabilities 7 6,720 18,208 6,273 18,736

Retirement benefit liabilities 4 78,655 74,349 73,424 76,505

Total liabilities 88,294,456 89,876,789 82,422,875 92,483,216

Equity

Called up share capital 25 1,206,006 1,206,006 1,363,330 1,363,330

Share premium account 1,019,932 1,019,932 1,153,079 1,153,079

Other reserves 961,214 232,634 (351,878) (562,481)

Retained earnings 3,600,446 4,182,492 4,171,692 4,879,727

Total equity attributable to shareholders of the parent company 6,787,598 6,641,064 6,336,223 6,833,655

Non-controlling interests 23,574 13,518 22,006 13,910

Total equity 6,811,172 6,654,582 6,358,229 6,847,565

Total equity and liabilities 95,105,628 96,531,371 88,781,104 99,330,781


Consolidated statement of changes in equityfor the year ended 31 December 2010

Other reserves

Called up share

capital

sharepremium account

Retainedearnings

Other reserves

Available-for-sale

fair value reserve

Cash flowhedging reserve

Foreign exchange

reserve

share-based

payment reserve

Total share-

holders’ equity

Non-controlling

interestsTotal

equity

CHF 000 2010

At 1 January 1,363,330 1,153,079 4,879,727 139,025 (531,416) 11,565 (179,024) (2,631) 6,833,655 13,910 6,847,565

Profit for the year – – 763,838 – – – – – 763,838 10,855 774,693

Other comprehensive income (net of tax):

– – (26,995) (62,018) 98,597 3,988 (209,007) 2,267 (193,168) (2,716) (195,884)

Available-for-sale investments – – – – 54,767 – – – 54,767 (388) 54,379

Cash flow hedges – – – – – 5,622 – – 5,622 – 5,622

Actuarial losses on defined benefit plans

– – (26,995) – – – – – (26,995) – (26,995)

Exchange differences – – – (62,018) 43,830 (1,634) (209,007) 2,267 (226,562) (2,328) (228,890)

Total comprehensive income for the year

– – 736,843 (62,018) 98,597 3,988 (209,007) 2,267 570,670 8,139 578,809

Dividends to shareholders – – (1,058,061) – – – – – (1,058,061) – (1,058,061)

Net impact of equity-settled share-based payments

– – – – – – – 57,666 57,666 – 57,666

Impact of business combination – – (395,446) 395,446 – – – – – – –

Other movements – – 8,629 1,263 388 11 – (77,998) (67,707) (43) (67,750)

At 31 December 1,363,330 1,153,079 4,171,692 473,716 (432,431) 15,564 (388,031) (20,696) 6,336,223 22,006 6,358,229

Other reserves

Called up share

capital

sharepremium account

Retainedearnings

Other reserves

Available-for-sale

fair value reserve

Cash flowhedging reserve

Foreign exchange

reserve

share-based

payment reserve

Total share-

holders’ equity

Non-controlling

interestsTotal

equity

CHF 000 2009

At 1 January 1,363,330 1,153,079 3,807,409 104,728 (1,298,245) (23,265) (195,098) 49,102 4,961,040 168,840 5,129,880

Profit for the year – – 964,539 – – – – – 964,539 12,551 977,090

Other comprehensive income (net of tax):

– – 91,388 (5,543) 855,608 36,417 16,074 902 994,846 (9,682) 985,164

Available-for-sale investments – – – – 848,408 – – – 848,408 3,862 852,270

Cash flow hedges – – – – – 37,376 – – 37,376 404 37,780

Actuarial gains on defined benefit plans

– – 91,388 – – – – – 91,388 661 92,049

Exchange differences – – – (5,543) 7,200 (959) 16,074 902 17,674 (14,609) 3,065

Total comprehensive income for the year

– – 1,055,927 (5,543) 855,608 36,417 16,074 902 1,959,385 2,869 1,962,254

Dividends to shareholders – – – – – – – – – (20,560) (20,560)

Net impact of equity-settled share-based payments

– – – – – – – 67,956 67,956 – 67,956

Change in ownership interest in subsidiaries

– – 135,619 – – – – – 135,619 (135,619) –

Other movements – – (119,228) 39,840 (88,779) (1,587) – (120,591) (290,345) (1,620) (291,965)

At 31 December 1,363,330 1,153,079 4,879,727 139,025 (531,416) 11,565 (179,024) (2,631) 6,833,655 13,910 6,847,565


Company’s incorporation

HSBC Private Banking Holdings (Suisse) SA was incorporated on 13 November 1996 in Geneva, Switzerland. Over the years it has become the holding company of the majority of HSBC Group’s private banking activities worldwide, known under the name of HSBC Global Private Banking. HSBC Private Banking Holdings (Suisse) SA is a wholly-owned subsidiary of HSBC Bank plc, in London. Its ultimate parent is HSBC Holdings plc, in London.

1. Basis of preparation

A. Compliance with International Financial Reporting Standards The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs). IFRSs comprise accounting standards issued by the International Accounting Standards Board (IASB) and its predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body.

The significant accounting policies applied in the preparation of these financial statements are set out in Note 2 below.

During 2010, the group adopted the following standards and amendments to standards:

The group adopted the revised IFRS 3 “Business Combinations” and amendments to IAS 27 “Consolidated and Separate Financial Statements”. The main changes under the standards are that:

acquisition-related costs are recognised as an expense in the income statement in the period in which they are incurred;

all consideration transferred, including contingent consideration, is recognised and measured at fair value at the acquisition date;

equity interests held prior to control being obtained are remeasured to fair value at the date of obtaining control, and any gain or loss is recognised in the income statement;

an option is available, on a transaction-by-transaction basis, to measure any non-controlling (previously referred to as minority) interests in the entity acquired either at fair value, or at the

non-controlling interests’ proportionate share of the net identifiable assets of the entity acquired; and

changes in a parent’s ownership interest in a subsidiary that do not result in a change of control are treated as transactions between equity holders and are reported in equity.

In terms of their application to the group, the revised IFRS 3 and the amendments to IAS 27 apply prospectively to acquisitions and transactions taking place on or after 1 January 2010, and have no significant effect on these consolidated financial statements.

During 2010, in addition to the above, the group adopted a number of standards, interpretations and amendments to standards which had an insignificant effect on the consolidated financial statements of the group and the separate financial statements of HSBC Private Banking Holdings (Suisse) SA.

B. ConsolidationThe consolidated financial statements comprise the financial statements of HSBC Private Banking Holdings (Suisse) SA and its subsidiaries (together “the group”). Entities that are controlled by the group are consolidated until the date that control ceases. Newly acquired subsidiaries are consolidated from the date that control is transferred to the group.

The acquisition method of accounting is used to account for the purchase of subsidiaries by the group. The acquisition cost of an acquisition is measured at the fair value of the consideration given at the date of exchange, together with costs directly attributable to that acquisition. The acquired identifiable assets, liabilities and contingent liabilities are measured at

their fair values at the date of purchase. Any excess of the cost of acquisition over the fair value of the group’s share of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the group’s share of the identifiable assets, liabilities and contingent liabilities of the business acquired, the difference is recognised immediately in the income statement.

All intra-group transactions are eliminated on consolidation.

C. Presentation of informationThe preparation of financial information requires the use of estimates and assumptions about future conditions. Use of available information and application of judgment are inherent in the formulation of estimates. Actual results in the future may differ from those reported. In this regard, management believes that the critical accounting policies where judgment is necessarily applied are those which relate to loan impairment, goodwill impairment, the valuation of financial instruments and stock compensation.

Certain prior year amounts have been reclassified to conform with the 2010 presentation.

D. Future accounting developmentsAt 31 December 2010, a number of standards and interpretations, and amendments thereto, had been issued by the IASB, which do not impact the group’s consolidated financial statements as at 31 December 2010. Those which are expected to have a significant effect on the group’s consolidated financial statements are discussed below.

standards and interpretations issued by the IAsB

In November 2009, the IASB issued IFRS 9 “Financial Instruments”. This introduced new requirements for the classification and measurement of financial assets. In October 2010, the IASB issued additions to IFRS 9 dealing with financial liabilities. Together, these changes represent the first instalments in the IASB’s planned phased replacement of IAS 39 “Financial Instruments: Recognition and Measurement” with a less complex and improved standard for financial instruments.

The standard is effective for annual periods beginning on or after 1 January 2013 with early adoption permitted. IFRS 9 is required to be applied retrospectively. If the standard is adopted prior to 1 January 2012, an entity will be exempt from the requirement to restate prior period comparative information. IFRS 9 is subject to EU endorsement, the timing of which is uncertain. Accordingly, the group is unable to provide a date by which it plans to apply IFRS 9.

The main changes to the requirements of IAS 39 are summarised below.

All financial assets that are currently in the scope of IAS 39 will be classified and measured at either amortised cost or fair value through profit and loss. The available-for-sale and held-to-maturity categories will no longer exist.

Classification is based on an entity’s business model for managing the financial assets at the date of initial application of the standard, and the contractual cash flow characteristics of the financial asset at inception of the contract. Reclassifications between the two categories are prohibited unless there is a change in the entity’s business model, in which case they would be required.

A financial asset is measured at amortised cost if two criteria are met: 1) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows; and 2) the contractual cash flows of the instrument are solely payments of principal and interest on the principal outstanding.

An entity is only permitted to designate a financial asset at fair value through profit and loss if doing so significantly reduces or eliminates an accounting mismatch. This designation is made on initial recognition and is irrevocable.

Financial instruments which contain embedded derivatives are to be classified in their entirety either at fair value or amortised cost depending on whether the contracts as a whole meet the relevant criteria under IFRS 9.

All equity financial assets are required to be measured at fair value through profit and loss unless an entity takes the option to designate the equity instrument that is not held for trading at fair value through other comprehensive income (FVTOCI). If this option is taken, all changes in fair value are recognised in other comprehensive income with no recycling of gains or losses to the profit and loss. Dividend income would continue to be recognised in the income statement.

Most of IAS 39’s requirements for financial liabilities are retained, including amortised cost accounting for most financial liabilities with bifurcation of embedded derivatives. However, fair value changes attributable to changes in own credit risk for financial liabilities designated under the fair value option, other than loan commitments and financial guarantee contracts, are to be presented in the statement of other comprehensive income. These amounts are not subsequently reclassified to the income statement but may be transferred within equity.

It is impracticable to quantify the impact of IFRS 9 as at the date of publication of these financial statements. However, a preliminary study indicates that, subject to technical clarification and the development of industry interpretations,

fewer financial assets are likely to be measured at fair value than at present, with the majority of the group’s available-for-sale debt securities being classified and measured at amortised cost; and

the amounts of financial instruments currently measured at amortised cost that will move to a fair value measurement basis are likely to be small or insignificant.

The next steps in the IASB’s project will address the impairment of financial assets measured at amortised cost and hedge accounting. The IASB has indicated that it aims to finalise the replacement of IAS 39 by June 2011. In addition, the IASB is working with the US Financial Accounting Standards Board to reduce inconsistencies between US GAAP and IFRS in accounting for financial instruments. The impact of IFRS 9 may change as a consequence of further developments resulting from the IASB’s financial instruments project. As a result, it is impracticable to quantify the impact of IFRS 9 as at the date of publication of these financial statements.

Notes to the financial statements


2. summary of significant accounting policies

A. Interest income and expense Interest income and expense for all interest-bearing financial instruments except those classified as held for trading are recognised in “Interest income” and “Interest expense” in the income statement using the effective interest method. The effective interest method is a way of calculating the amortised cost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the group estimates cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation includes all amounts paid or received by the group that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts.

Interest on impaired financial assets is recognised at the original effective interest rate of the financial asset applied to the carrying amount as reduced by any allowance for impairment.

B. Non-interest incomeFee income Earned from a diverse range of services provided by the group to its customers, fee income is accounted for as follows:

income earned on the execution of a significant act is recognised as revenue when the significant act is completed (for example, fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the arrangement for the acquisition of shares or other securities);

income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management, portfolio, and other management advisory and service fees);

income which forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in “Interest income”.

Net trading income This comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with related interest income, expense and dividends.

Dividend income Dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for equity securities.

C. Cash and cash equivalentsFor the purpose of the cash flow statement, cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with less than three months’ maturity from the date of acquisition, and include cash and balances at central banks, treasury bills and other eligible bills, loans and advances to banks, items in the course of collection from or in transmission to other banks, and certificates of deposit.

D. Determination of fair valueAll financial instruments are recognised initially at fair value. The fair value of a financial instrument on initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received. In certain circumstances, however, the initial fair value may be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a valuation technique whose variables include only data from observable markets.

Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in active markets are based on bid prices for assets held or liabilities to be issued and offer prices for assets to be acquired or liabilities held at the time. When independent prices are not available, fair values are determined by using valuation techniques which refer to observable market data. These include comparison with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.

For certain derivatives, fair values may be determined in whole or in part using valuation techniques based on assumptions that are not supported by prices from current market transactions or observable market data.

Valuation techniques incorporate assumptions about factors that other market participants would use in their valuation, including interest rate yield curves, exchange rates, volatilities, and prepayment and default rates. If there are additional factors that are not incorporated within the valuation model but would be considered by market participants, further fair value adjustments are applied to model calculated fair values. These fair value adjustments include adjustments for bid-offer spread, model uncertainty, credit risk and model limitation. Where a financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is calculated as the product of the number of units and quoted price and no block discounts are made.

If the fair value of a financial asset measured at fair value becomes negative, the financial instrument is recorded as a financial liability until its fair value becomes positive, at which time the financial instrument is recorded as a financial asset, or it is extinguished.

E. Reclassification of financial assets Non-derivative financial assets (other than those designated at fair value through profit and loss upon initial recognition) may be reclassified out of the fair value through profit and loss category in the following circumstances:

Financial assets that would have met the definition of loans and receivables at initial recognition (if the financial asset had not been required to be classified as held for trading) may be reclassified out of the fair value through profit and loss category if there is the intention and ability to hold the financial asset for the foreseeable future or until maturity; and

Financial assets (except financial assets that would have met the definition of loans and receivables at initial recognition) may be reclassified out of the fair value through profit and loss category and into another category in rare circumstances.

When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost, as applicable.

F. Loans and advances to banks and customers Loans and advances to banks and customers include loans and advances originated by the group which are not intended to be sold in the short term and have not been classified either as held for trading or designated at fair value through profit and loss. Loans and advances are recognised when cash is advanced to borrowers. They are derecognised when either borrowers repay their obligations, or the loans are sold or written off or substantially all the risks and rewards of ownership are transferred. They are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest method, less impairment losses.

Where exposures are hedged by derivatives designated and qualifying as fair value hedges, the carrying value of the loans and advances so hedged includes a fair value adjustment for the hedged risk only.

G. Impairment of loans and advances It is the group’s policy that each operating bank will recognise losses for impaired loans promptly where there is objective evidence that impairment of a loan or portfolio of loans has occurred. This is done on a consistent basis in accordance with established group guidelines.

There are two basic methods of calculating impairment losses, those calculated on individual loans and those losses assessed on a collective basis. Losses expected as a result of future events, no matter how likely, are not recognised.

1. Individually assessed loans and advances

Impairment losses on individually assessed accounts are determined by an evaluation of the exposures on a case-by-case basis. The group assesses at each balance sheet date whether there is any objective evidence that a loan is impaired. In determining such impairment losses on individually assessed accounts, the following factors are considered:

the group’s aggregate exposure to the customer;

the viability of the customer’s business model and capability to trade successfully out of financial difficulties and generate sufficient cash flow to service its debt obligations;

the amount and timing of expected receipts and recoveries;

the extent of other creditors’ commitments ranking ahead of, or pari passu with, the group and the likelihood of other creditors continuing to support the Company;

the complexity of determining the aggregate amount and ranking of all creditor claims and the extent to which legal and insurance uncertainties are evident;

the realisable value of security (or other credit mitigants) and likelihood of successful repossession; and

the ability of the borrower to obtain, and make payments in, the currency of the loan if not denominated in local currency.

Impairment losses are calculated by discounting the expected future cash flows of a loan at its original effective interest rate, and comparing the resultant present value with the loan’s current carrying amount. Any loss is charged in the income statement. The carrying amount of impaired loans on the balance sheet is reduced through the use of an impairment allowance.

The impairment allowances on individually significant accounts are reviewed at least semi-annually, and more regularly when circumstances require. This normally encompasses re-assessment of the enforceability of any collateral held and of actual and anticipated receipts. Individually assessed impairment allowances are only released when there is reasonable and objective evidence of a reduction in the established loss estimate.

2. Collectively assessed loans and advances

These loans are grouped together on the basis of similar credit risk characteristics for the purpose of calculating a collective impairment loss. This loss covers loans that are impaired at the balance sheet date but which will not be individually identified as such until some time in the future.

The collective impairment loss is determined after taking into account:

expected loss rates that reflect the actual experience of losses as a percentage of the outstanding loans over the last five years. A weighted average calculation is used to give greater emphasis to losses in more recent years than to those in earlier years;

the estimated period between a loss becoming identified and a specific provision raised as determined by local management;



management’s experienced judgment as to whether the current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience.

3. Write-off of loans and advances

Loans (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of recovery of these amounts and, for collateralised loans, when the proceeds from the realisation of security have been received.

4. Reversals of impairment

If, in a subsequent period, the amount of an impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed to the extent it is now excessive by reducing the loan impairment allowance account. The amount of any reversal is recognised in the income statement.

H. Trading assets Debt securities and equity shares which have been acquired principally for the purpose of selling or repurchasing in the near term or are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking are classified as held for trading. Such financial assets are recognised initially at fair value using trade date accounting, with transaction costs taken to the income statement. Subsequently, the fair values of these assets are remeasured, and gains and losses from changes therein, together with related interest income, interest expense and dividends, are recognised in the income statement in “Net trading income”.

I. Financial investments Treasury bills, debt securities and equity shares intended to be held on a continuing basis are classified as available-for-sale securities or held-to-maturity. Financial investments are recognised on trade date, when the group enters into contractual arrangements with counterparties to purchase securities, and are normally derecognised when either the securities are sold or the borrowers repay their obligations. Financial investments are recognised using trade date accounting.

Available-for-sale securities are initially measured at fair value plus directly and incremental transaction costs. They are subsequently remeasured at fair value, and changes therein are recognised in other comprehensive income in “Available-for-sale investments – fair value gains/(losses)” until the financial assets are either sold or become impaired.

When available-for-sale securities are sold, cumulative gains or losses previously recognised in other comprehensive income are recognised in the income statement as “Gains less losses from financial investments”.

Interest income is recognised on available-for-sale securities using the effective interest method, calculated over the asset’s expected life. Premiums and/or discounts arising on the purchase of dated investment securities are included in the calculation of their effective interest rates. Dividends are recognised in the income statement when the right to receive payment has been established.

An assessment is made at each balance sheet date as to whether there is any objective evidence of impairment, being circumstances where an adverse impact on estimated future cash flows of the financial asset or group of assets can be reliably estimated.

If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition cost (net of any principal repayments and amortisation) and the current fair value, less any previous impairment loss recognised in the income statement,

is removed from other comprehensive income and recognised in the income statement.

Impairment losses for available-for-sale debt securities are recognised within “Loan impairment charges and other credit risk provisions” in the income statement, and impairment losses for available-for-sale equity securities are recognised within “Gains less losses from financial investments” in the income statement.

Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent accounting treatment for changes in the fair value of that asset differs depending on the nature of the available-for-sale financial asset concerned:

For an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, the decline in fair value of the financial asset is recognised in other comprehensive income. If the fair value of the debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement to the extent of the increase in fair value.

For an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised directly in other comprehensive income. Impairment losses recognised on the equity security are not reversed through the income statement. Subsequent decreases in the fair value of the available-for-sale equity security are recognised in the income statement, to the extent that further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity security less any impairment loss previously recognised.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the group positively intends, and is able, to hold until maturity. Held-to-maturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest method, less any impairment losses.

J. Sale and repurchase agreements (including stock lending and borrowing) When securities are sold subject to a commitment to repurchase them at a predetermined price (“repos”), they remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under commitments to sell (“reverse repos”) are not recognised on the balance sheet and the consideration paid is recorded in “Loans and advances to banks” or “Loans and advances to customers” as appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the life of the agreement.

Securities lending and borrowing transactions are generally secured, with collateral taking the form of securities or cash advanced or received. The transfer of securities to counterparties is not normally reflected on the balance sheet. Cash collateral advanced or received is recorded as an asset or a liability respectively.

Securities borrowed are not recognised on the balance sheet, unless they are sold on to third parties, in which case the obligation to return the securities is recorded as a trading liability and measured at fair value, and any gains or losses are included in “Net trading income”.

For repos and securities lending, if the counterparty has the right to sell or repledge the securities transferred, the securities are presented separately on the balance sheet from assets that may not be repledged or resold by a counterparty.

K. Derivatives and hedge accountingDerivatives are recognised initially, and are subsequently remeasured, at fair value. Fair values of exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are obtained using valuation techniques, including discounted cash flow models and option pricing models.

All derivatives are classified as assets when their fair value is positive, or as liabilities when their fair value is negative.

The method of recognising the resulting fair value gains or losses depends on whether the derivative is held for trading, or is designated as a hedging instrument, and if so, the nature of the risk being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement. When derivatives are designated as hedges, the group classifies them as either: 1) hedges of the change in fair value of recognised assets or liabilities or firm commitments (“fair value hedges”); 2) hedges of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (“cash flow hedges”). Hedge accounting is applied to derivatives designated as hedging instruments in a fair value or cash flow hedge provided certain criteria are met.

hedge accountingAt the inception of a hedging relationship, it is the group’s policy to document the relationship between the hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge. Such policies also require documentation of the assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items attributable to the hedged risks. Interest on designated qualifying hedges is included in “Net interest income”.

Fair value hedgeChanges in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recorded in the income statement, along with changes in the fair value of the assets or liabilities that are attributable to the hedged risk.

If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to the income statement over the residual period to maturity. Where the adjustment relates to the carrying amount of a hedged available-for-sale equity security, this remains in equity until the disposal of the equity security.

Cash flow hedgeThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income within the cash flow hedging reserve. Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the income statement.

Amounts accumulated in other compre-hensive income are recycled to the income statement in the periods in which the hedged item will affect profit and loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income are removed from equity and included in the initial measurement of the cost of the asset or liability.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in equity until the forecast transaction is no longer expected to occur, and the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.



hedge effectiveness testingTo qualify for hedge accounting, IAS 39 requires that at the inception of the hedge and throughout its life, each hedge must be expected to be highly effective (prospective effectiveness). Actual effectiveness (retrospective effectiveness) must also be demonstrated on an ongoing basis.

The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method a group entity adopts for assessing hedge effectiveness will depend on its risk management strategy.

For fair value hedge relationships, group entities utilise the cumulative dollar offset method or regression analysis as effectiveness testing methodologies. For cash flow hedge relationships, group entities utilise the change in variable cash flow method or the cumulative dollar offset method using the hypothetical derivative approach.

For prospective effectiveness, the hedging instrument must be expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness, the changes in fair value or cash flows must offset each other in the range of 80% to 125% for the hedge to be deemed effective.

Derivatives that do not qualify for hedge accountingAll gains and losses from changes in the fair value of any derivatives that do not qualify for hedge accounting are recognised immediately in the income statement. These gains and losses are reported in “Net trading income”.

L. Derecognition of financial assets and liabilitiesFinancial assets are derecognised when the contractual right to receive cash flows from the assets has expired; or when the group has transferred its contractual right to receive the cash flows of the financial assets and has transferred substantially all the risks and rewards of ownership; or where control is not retained. Financial

liabilities are derecognised when they are extinguished, i.e. when the obligation is discharged, cancelled or expires.

M. Associates1. Investments in associates are recognised

using the equity method, initially stated at cost, including attributable goodwill, and are adjusted thereafter for the post-acquisition change in the group’s share of net assets.

2. Unrealised gains on transactions between the group and its associates are eliminated to the extent of the group’s interest in the associates. Unrealised losses are also eliminated to the extent of the group’s interest in the associates, unless the transaction provides evidence of an impairment of the asset transferred.

N. Goodwill and intangible assets1. Goodwill arises on business combinations,

including the acquisition of subsidiaries or associates when the cost of acquisition exceeds the fair value of the group’s share of the identifiable assets, liabilities and contingent liabilities acquired. By contrast, if the group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of an acquired business is greater than the cost to acquire, the excess is recognised immediately in the income statement.

Goodwill on acquisitions of associates is included in “Interests in associates”. Goodwill is allocated to cash-generating units for the purposes of impairment testing, which is undertaken for impairment at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is performed at least annually by comparing the present value of the expected future cash flows from a business with the carrying value of its net assets, including attributable goodwill. Goodwill is stated at cost less accumulated impairment losses which are charged to the income statement.

At the date of disposal of a business, attributable goodwill is included in the group’s share of net assets in the calculation of the gain or loss on disposal.

2. Intangible assets that have a finite useful life, except for the value of in-force long-term insurance business, are stated at cost less amortisation and accumulated impairment losses, and are amortised over their estimated useful lives. Estimated useful life is the lower of legal duration and expected economic life.

Intangible assets are subject to impairment review if there are events or changes in circumstances that indicate that the carrying amount may not be recoverable.

Intangible assets are amortised, generally on a straight-line basis, over their finite useful lives as follows:

purchased software: between three and five years;

internally generated software: between three and five years;

customer/merchant relationships: between three and fifteen years.

O. Property and equipment1. Land and buildings are stated at historical

cost, or fair value at the date of transition to IFRSs (“deemed cost”) less any impairment losses and depreciation calculated to write off the assets over their estimated useful lives, as follows:

freehold land is not depreciated; and

freehold buildings are depreciated at the greatest of 2% per annum on a straight-line basis; or over the unexpired terms of the leases; or over the remaining useful lives.

2. Equipment, fixtures and fittings are stated at cost less any impairment losses and depreciated on a straight-line basis to write off the assets over their estimated useful lives, which are generally between three and five years.

3. Property and equipment is subject to an impairment review if there are events or changes in circumstances which indicate that the carrying amount may not be recoverable.

P. Finance and operating leases1. When the group is a lessee under finance

leases, the leased assets are capitalised and included in “Property and equipment” and the corresponding liability to the lessor is included in “Other liabilities”. The finance lease and its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of the minimum lease payments. Finance charges payable are recognised over the periods of the leases based on the interest rates implicit in the leases so as to give a constant rate of interest on the remaining balance of the liability.

2. All other leases are classified as operating leases. When acting as lessor, the group includes the assets subject to operating leases in “Property and equipment” and accounts for them accordingly. Impairment losses are recognised to the extent that residual values are not fully recoverable and the carrying value of the equipment is thereby impaired. When the group is the lessee, the leased assets are not recognised on the balance sheet. Rentals payable and receivable under operating leases are accounted for on a straight-line basis over the periods of the leases and are included in “General and administrative expenses” and “Other operating income” respectively.

Q. Income taxIncome tax comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in the same statement in which the related item appears.

Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantially enacted by the balance sheet date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when the group intends to settle on a net basis and the legal right to set off exists.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the balance sheet

and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.

Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled. Deferred tax assets and liabilities are offset when they arise in the same tax reporting group and relate to income taxes levied by the same taxation authority, and when a legal right to set off exists in the entity.

Deferred tax relating to actuarial gains and losses arising from post-employment benefit plans which are recognised directly in other comprehensive income, is also credited or charged directly to equity. Deferred tax relating to share-based payment transaction is recognised directly in other comprehensive income to the extent that the amount of the estimated future tax deduction exceeds the amount of the related cumulative remuneration expense. Deferred tax relating to fair value remeasurement of available-for-sale investments and cash flow hedge instruments, which are charged or credited directly to other comprehensive income, is also credited or charged directly to other comprehensive income. It is subsequently recognised in the income statement when the deferred fair value gain or loss is recognised in the income statement.

R. Post-employment benefit plansThe group operates a number of defined benefit and defined contribution pension plans.

Payments to defined contribution plans and state-managed retirement benefit plans, where the group’s obligations under the plans are equivalent to a defined contribution plan, are charged as an expense as they fall due.

The costs recognised for funding defined benefit plans are determined using the Projected Unit Credit Method, with annual actuarial valuations performed on each plan. Actuarial differences that arise are recognised in shareholders’ equity and presented in the “Statement of other comprehensive income” in the period they arise. Past service costs are recognised immediately to the extent the benefits are vested, and are otherwise recognised on a straight-line basis over the average period until the benefits are vested. The current service costs and any past service costs, together with the expected return on plan assets less the unwinding of the discount on the plan liabilities, are charged to operating expenses.

The net defined benefit liability recognised in the balance sheet represents the present value of the defined benefit obligations adjusted for unrecognised past service costs and reduced by the fair value of plan assets. Any resulting asset is limited to unrecognised past service costs plus the present value of available refunds and reductions in future contributions to the plan. All cumulative actuarial gains and losses on defined benefit plans have been recognised in other comprehensive income at the date of transition to IFRSs.

S. Share-based paymentsShares in HSBC Holdings plc awarded to an employee on joining the group that are made available immediately, with no vesting period attached to the award, are expensed immediately. When an inducement is awarded to an employee on commencement of employment with the group, and the employee must complete a specified period of service before the inducement vests, the expense is spread over the period to vesting on a straight-line basis with corresponding credit to the share-based payment reserve.

The compensation expense of share options is recognised on a straight-line basis over the vesting period. Compensation expense is determined by reference to the fair value of the options on grant date, and by the impact of any non-market vesting conditions such as option lapses.



An option may lapse if, for example, an employee ceases to be employed by the group before the end of the vesting period. Estimates of such future employee departures are taken into account when accruing the cost during the service period.

The cost of guaranteed bonuses awarded in respect of past service, by which an employee is required to complete a specified period of future service to be entitled to the award, is spread over the period of service rendered to the vesting date.

Retention awards granted to encourage existing employees to remain with the group are expensed over the vesting period.

Discretionary bonuses awarded in respect of service in the past are expensed over the vesting period which, in this case, is the period from the date the bonus is announced until the award vests.

T. Foreign currencies1. Items included in the financial

statements of each of the group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The functional currency of the parent company is the US dollar (USD). The consolidated financial statements of HSBC Private Banking Holdings (Suisse) SA are presented in Swiss francs (CHF), which is the group’s presentation currency.

2. Transactions in foreign currencies are recorded in the functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange differences are included in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into the functional currency using the rate of exchange at the date of the initial transaction. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated into

the functional currency using the rate of exchange at the date the fair value was determined.

3. The results of branches, subsidiaries and associates not reporting, whose functional currency is not the US dollar, are translated into US dollars at the average rates of exchange for the reporting period. Exchange differences arising from the retranslation of opening foreign currency net investments, and the related cost of hedging and exchange differences arising from retranslation of the result for the reporting period from the average rate to the exchange rate prevailing at the period-end, are recognised in other comprehensive income in “Exchange Differences”. Exchange differences on a monetary item that is part of a net investment in a foreign operation are recognised in the income statement of the separate subsidiary financial statements. In consolidated financial statements, these exchange differences are recognised in other comprehensive income. On disposal of a foreign operation, exchange differences relating thereto and previously recognised in other comprehensive income are recognised in the income statement.

U. ProvisionsProvisions are recognised when it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation as a result of past events, and a reliable estimate can be made of the amount of the obligation.

V. Debt securities in issue and subordinated liabilitiesDebt securities in issue and subordinated liabilities are initially measured at fair value, which is normally the consideration received, net of directly attributable transaction costs incurred. Subsequent measurement is at amortised cost, using the effective interest method to amortise the difference between proceeds net of directly attributable transaction costs and the redemption amount over the expected life of the debt.

W. Share capitalShares are classified as equity when there is no contractual obligation to transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax.

3. Net operating income

Net operating income is stated after the following items of income, expense, and gains and losses:

4. Employee compensation and benefits

CHF 000 2010 2009

Income

Interest on financial instruments, excluding interest on financial assets held for trading or designated at fair value 1,459,721 1,861,377

Interest recognised on impaired financial assets 3,503 537

Fees earned on trust and other fiduciary activities where the group holds or invests assets on behalf of its customers 62,144 65,552

Gain/(loss) on sale of subsidiaries, associates and joint ventures (85) 5,742

Expense

Interest on financial instruments, excluding interest on financial liabilities held for trading or designated at fair value (361,722) (560,257)

Gains/(losses)

Net impairment loss on loans and advances (32,315) (31,645)

Net loss of impairment in respect of available-for-sale financial investments (5,085) (54,160)

Gain on disposal of property, equipment and non-financial investments 18 14,443

CHF 000 2010 2009

Wages and salaries 854,108 852,201

Social security costs 59,792 56,755

Post-employment benefits 43,327 42,350

957,227 951,306

The average number of persons employed by the group during the year 2010 was 4,776 (2009: 4,793).



A. Post-employment benefit plans The group operates pension plans in Continental Europe and Asia, covering 86.7% of the group’s employees, with a total pension cost of CHF 43.3 million (2009: pension benefit of CHF 42.4 million).

The majority of the existing plans are funded defined benefit plans, which cover 55% of the group’s employees, with assets, in the case of most of the larger plans, held in trust or similar funds separate from the group. The plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The actuarial assumptions used to calculate the defined benefit obligations and related net periodic pension cost vary according to the economic conditions of the countries in which they are situated.

In Switzerland, the HSBC Private Bank (Suisse) SA Pension Plan covers employees of HSBC Private Bank (Suisse) SA and certain other employees of the group.

The pension cost for defined contribution plans, which cover 31.3% (2009: 30.8%) of the group’s employees, was CHF 18.1 million (2009: CHF 18.4 million).

In 2010 the UK governments levied one-off taxes in respect of certain bonuses payable by banks and banking groups. The tax, a liability of the employer, was levied at 50% on bonuses, whether in cash or shares, awarded in a certain period and over a threshold amount.

In 2010 the group paid the one-off taxes of CHF 6.3 million in respect of its UK business.

B. Post-employment defined benefit plan’s principal actuarial assumptions The principal actuarial financial assumptions used to calculate the defined benefit pension plans at 31 December 2010 were:

C. Defined benefit pension plansValue recognised in the balance sheet:

The discount rates are based upon yield on high quality (AA rated) corporate debt instruments. The expected rate of return on plan assets is determined in consultation with HSBC’s actuaries, based on historical market returns and adjusted for additional factors such as the current rate of inflation and interest rates.

The principal actuarial financial assumptions used to calculate the defined benefit pension plans at 31 December 2009 were:

Discount rate

Expected rate of

return on plan assets

Inflation assumption

Rate of increase for

pensions in payment

and deferred pension

Rate of pay increase

% 2010

Switzerland 2.60 4.48 1.50 – 2.50

Hong Kong 2.85 7.00 – – 5.00

Other 5.15 5.85 3.43 3.43 4.67

Discount rate

Expected rate of

return on plan assets

Inflation assumption

Rate of increase for

pensions in payment

and deferred pension

Rate of pay increase

% 2009

Switzerland 3.25 4.55 1.50 – 2.50

Hong Kong 2.58 6.50 – – 2.00

Other 5.49 5.78 3.28 3.37 4.62

hsBC Private Bank

(suisse) sA Pension plan Other plans

hsBC Private Bank


CHF 000 2010 2009

Equities 248,472 35,930 108,635 158,312

Bonds 257,902 20,444 161,582 132,920

Property 32,836 2,980 2,130 16,273

Other 90,267 3,781 31,951 25,961

Fair value of plan assets 629,477 63,135 304,298 333,466

Present value of funded obligation (689,589) (69,386) (365,571) (315,804)

Defined benefit plan surpluses unrecognised (7,061) – – (32,894)

Net liability (67,173) (6,251) (61,273) (15,232)

hsBC Private Bank


hsBC Private Bank


CHF 000 2010 2009

At 1 January 365,571 315,804 393,671 365,506

Current service cost 29,302 3,249 25,398 12,179

Interest cost 19,294 3,817 10,025 10,714

Contributions by employees 13,988 58 10,948 3,422

Actuarial (gains)/losses 60,734 (3,491) (64,940) (34,968)

Benefits paid (32,514) (2,922) (12,576) (35,257)

Intercompany transfers 252,927 (232,298) – –

Liabilities extinguished on settlements (11,356) – – –

Exchange differences (8,357) (14,831) 3,045 (5,792)

At 31 December 689,589 69,386 365,571 315,804

Change in the present value of the defined benefit obligation:



The group expects to make contributions of CHF 32 million to defined benefit pension plans during 2011.

Changes in the unrecognised benefit plan surpluses:

Summary

hsBC Private Bank


hsBC Private Bank


CHF 000 2010 2009

At 1 January 304,298 333,466 252,286 302,479

Expected return on plan assets 26,695 3,975 12,112 15,122

Contributions by HSBC 63,278 2,843 23,065 15,373

Contributions by employees 13,988 58 10,948 3,422

Experience gains/(losses) (14,739) 5,374 19,506 32,199

Benefits paid (32,514) (2,922) (12,576) (35,257)


Assets distributed on settlements (11,521) – – –

Exchange differences (6,358) (14,140) (1,043) 128

At 31 December 629,477 63,135 304,298 333,466

hsBC Private Bank


hsBC Private Bank


CHF 000 2010 2009

At 1 January – 32,894 – –


Net amounts recognised in equity (28,715) – – 34,893

Exchange and other movements 3,533 (651) – (1,999)

At 31 December 7,061 – – 32,894

Total expense recognised in the income statement, in “Employee compensation and benefits”:

Total net actuarial losses recognised in the statement of other comprehensive income in 2010 in respect of defined benefit pension plans were CHF 37.9 million (2009: CHF 116.7 million gains). Total net actuarial losses recognised in other comprehensive income to date were CHF 231.1 million (2009: CHF 193.2 million losses).

hsBC Private Bank


hsBC Private Bank


CHF 000 2010 2009

Current service cost 29,302 3,249 25,398 12,179

Interest cost 19,294 3,817 10,025 10,714

Expected return on plan assets (26,695) (3,975) (12,112) (15,122)

Losses on settlements 165 – – –

Total expense 22,066 3,091 23,311 7,771

hsBC Private Bank


hsBC Private Bank


CHF 000 2010 2009

Defined benefit obligation (689,589) (69,386) (365,571) (315,804)

Fair value of plan assets 629,477 63,135 304,298 333,466

Effect of limit on plan surpluses (7,061) – – (32,894)

Net deficit (67,173) (6,251) (61,273) (15,232)

Experience gains/(losses) on plan liabilities 41,961 4,153 20,131 (22,321)

Experience gains/(losses) on plan assets (14,739) 5,374 19,506 32,199

Gains/(losses) from changes in actuarial assumption (73,980) (662) 44,809 22,395

Total net actuarial gains/(losses) (46,758) 8,865 84,446 32,273

Change in fair value of plan assets:



5. General and administrative expenses

Auditors’ remuneration Auditors’ remuneration in relation to statutory audit amounted to CHF 2.6 million (2009: CHF 2.9 million). The following fees were payable by the group to the group’s principal auditor, KPMG SA and its associates (together “KPMG”):

Other services pursuant to legislation include services for assurance and other services that are in relation to statutory and regulatory filings, including comfort letters and interim reviews.

6. share-based payments

The group has no specific share-based payment arrangements of its own and participates in HSBC Holdings plans consisting of share option awards and share awards.

Share option awards are granted by HSBC Holdings to group employees and are accounted for as equity-settled share-based payments, as they are satisfied by HSBC Holdings transferring shares to the employees on exercise.

Where an award of HSBC Holdings shares is made to a group employee by a group entity, the employing entity has an obligation to transfer HSBC Holdings shares to the employee if the vesting conditions of the award are satisfied. The employing entity incurs a liability in respect of the share awards recognised at fair value, remeasured at each reporting date over the vesting period and at the date of settlement.

During 2010, CHF 66.9 million was charged to the income statement in respect of equity-settled share-based payment transactions (2009: CHF 67.9 million). This expense was based on the fair value of the share-based payment transactions when contracted. All of the expense arose under employee share awards made within HSBC’s reward structures. The carrying amount of the share-based payment liability at the balance sheet date was CHF 129.3 million (2009: CHF 147.8 million).

Calculation of fair valuesFair values of share options measured at the grant date are calculated using a binomial lattice model methodology that is based on the underlying assumptions of the Black-Scholes model. The expected life of options depends on the behaviour of option holders, which is incorporated into the option model consistent with historic observable data. The fair values calculated are inherently subjective and uncertain due to the assumptions made and the limitations of the model used.

CHF 000 2010 2009

Audit fees for hsBC Private Banking holdings (suisse) sA statutory audit

Fees relating to current year 2,561 2,717

Fees relating to prior year – 208

Total 2,561 2,925

Fees payable to KPMG for other services provided to hsBC

Other services pursuant to legislation 1,804 1,470

Tax services 129 82

Services relating to information technology – 119

Services relating to recruitment and remuneration 4 –

Other services 104 4

Total 2,041 1,675

Total fees payable 4,602 4,600

Number 000’s 2010 2009

Number of restricted shares awarded

Outstanding at 1 January 24,534 16,742

Adjustment for rights issue – 2,812

Granted in the year 6,683 12,381

Released in the year (8,946) (9,912)

Forfeited in the year (272) (588)

Transferred in the year 627 3,099

Outstanding at 31 December 22,626 24,534

The significant weighted average assumptions used to estimate the fair value of the options granted in 2010 and 2009 were as follows:

The HSBC Share PlanThe HSBC Share Plan was adopted by HSBC in 2005. This plan comprises Performance Share Awards, Restricted Share Awards and Achievement Share Awards. The aim of the HSBC Share Plan is to align the interests of executives to the creation of shareholder value and recognise individual performance and potential. Awards are also made under this plan for recruitment and retention purposes.

Restricted Share AwardsRestricted Share Awards are made to eligible employees for recruitment and retention purposes or as part of deferral of annual bonus. The awards vest between one and three years from date of award.

The weighted average fair value of shares awarded by HSBC for Restricted Share Awards in 2010 was GBP 6.67 (2009: GBP 4.50).

1 The risk-free rate was determined from the UK gilts yield curve for group Share Option Plan awards and UK Savings-Related Share Option Schemes in the U.K. A similar yield curve was used for the Overseas Savings-Related Share Option Schemes outside the U.K.

2 Expected life is not a single input parameter but a function of various behavioural assumptions.3 Expected volatility is estimated by considering both historic average share price volatility and implied volatility derived from traded options over HSBC shares of similar maturity to those of the employee options.

1-Year savings- Related share

Option schemes

3-Year savings-Related share

Option schemes


Option schemes

2010

Risk-free interest rate1 (%) 0.7 1.9 2.9

Expected life2 (years) 1.0 3.0 5.0

Expected volatility3 (%) 30.0 30.0 30.0

Share price at grant date (GBP) 6.82 6.82 6.82


Option schemes

3-Year savings-Related share

Option schemes


Option schemes

2009

Risk-free interest rate1 (%) 0.7 2.1 2.4

Expected life2 (years) 1.0 3.0 5.0

Expected volatility3 (%) 50.0 35.0 30.0

Share price at grant date (GBP) 4.65 4.65 4.65



Savings-related share option plansSavings-related share option plans invite eligible employees to enter into savings contracts to save up to GBP 250 per month, with the option to use the savings to acquire shares. The aim of the plans is to align the interests of all employees with the creation of shareholder value. The options are exercisable within three months following the first anniversary of the commencement of a one-year savings contract or within six months following either the third or the fifth anniversary of the commencement of three-year or five-year contracts, respectively. The exercise price is set at a 20% (2009: 20%) discount to the market value immediately preceding the date of invitation.

The weighted average fair value of options granted in the year as at the date of grant was GBP 1.60 (2009: GBP 1.40).

The number of options, the weighted average exercise price, and the weighted average remaining contractual life for options outstanding at the balance sheet date, analysed by exercise price range, were as follows:

Number(000’s)

Weighted average exercise

price (GBP)Number(000’s)

Weighted average exercise

price (GBP)

2010 2009

share options

Outstanding at 1 January 4,910 5.63 2,275 7.02

Adjustment for rights issue – – 227 3.31

Granted in the year 559 5.46 4,032 3.31

Exercised in the year (486) 4.99 (107) 5.24

Forfeited in the year – – (3) 6.10

Transferred in the year 35 5.23 209 5.50

Expired in the year (536) 5.26 (1,723) 6.18

Outstanding at 31 December 4,482 5.30 4,910 5.63

2010 2009

share options

Exercise price range (GBP) 3.31-6.69 3.31-7.67

Weighted average remaining contractual life (years) 2.07 2.68

Of which exercisable:

Number (000’s) 61 125

Weighted average exercise price (GBP) 5.23 5.26

Other awards made under the Restricted Share Plan 2000Other awards were made under the HSBC Holdings Restricted Share Plan 2000 as part deferral of annual bonus. Awards were also made for recruitment and retention purposes. The awards generally vest from one to three years from the date of award. Awards made under this plan ceased in May 2005. Awards of Restricted Shares on or after 27 May 2005 were made under the rules of the HSBC Share Plan.

7. Tax expense

The charge for taxation comprised:

No shares were awarded by the group in 2010 and 2009 for HSBC Holdings Restricted Share Plan 2000.

HSBC Private Banking Holdings (Suisse) SA and its subsidiary undertakings in Switzerland provided for Swiss corporation tax at 24% (2009: 24%). Other overseas subsidiary undertakings and overseas branches provided for taxation at the appropriate rates in the countries in which they operate.

The following table reconciles the overall tax charge which could apply if all profits had been taxed at the Swiss corporation tax rate:

Number 000’s 2010 2009

Awards of restricted shares

Outstanding at 1 January – 59

Released in the year – (59)

Outstanding at 31 December – –

CHF 000 2010 2009

Current tax

Swiss corporation tax charge – on current year profit 55,115 74,873

Swiss corporation tax charge – adjustments in respect of prior years (1,698) 525

Overseas tax – on current year profit 114,546 110,792

Overseas tax – adjustments in respect of prior years 2,166 (9,137)

Total 170,129 177,053

Deferred tax

Origination and reversal of temporary differences 7,044 6,646

Effect of changes in tax rates (1,672) –

Adjustment in respect of prior years 1,464 1,400

Total 6,836 8,046

Total tax expense 176,965 185,099

In addition to the amount charged to the income statement, the aggregate amount of deferred taxation, relating to items that are taken directly to equity, was a CHF 22.8 million increase in other comprehensive income (2009: CHF 146.9 million decrease in other comprehensive income).

The group is subject to income taxes in many jurisdictions and significant judgment is required in estimating the group’s provision for income taxes. There are many transactions and interpretations of tax law for which the final outcome will not be established until some time later. The group recognises liabilities for taxation based on estimates of whether additional taxes will be payable. The estimation process includes seeking expert advice where appropriate. Where the final liability for taxation is different from the amounts that were initially recorded, these differences will affect the income tax and deferred taxation provisions in the period in which the estimate is revised or the final liability is established.

ChF 000Overall tax

charge in % ChF 000Overall tax

charge in %

2010 2009

Analysis of overall tax expense

Taxation at Swiss corporate tax rate of 24% (2009: 24%) 228,399 24.0 278,925 24.0

Effect of taxing overseas profits at different rates1 (39,013) (4.1) (42,301) (3.6)

Non-taxable income (35,640) (3.8) (47,901) (4.1)

Effect of non-deductible expense 20,648 2.2 4,138 0.3

Adjustments in respect of prior years 1,932 0.2 (7,212) (0.6)

Other items 639 0.1 (550) 0.1

Overall tax expense 176,965 18.6 185,099 15.9

1 Overseas profits taxed at different rates to the one applied in Switzerland contributed to a reduction in the statutory tax rate of 4.1% (2009: 3.6%).



Retirement benefits

Loan impairmentallowances

Acceleratedcapital

allowances

Available-for-sale

investmentsCash flow

hedgesshare-based

paymentsRevaluation of property Other Total

CHF 000 2010

Assets 233 121 171 (11) – 6,943 – 8,328 15,785

Liabilities 13,125 (23,997) (197) 3,083 (2,877) 522 (11,392) 2,997 (18,736)

At 1 January 13,358 (23,876) (26) 3,072 (2,877) 7,465 (11,392) 11,325 (2,951)

Income statement:

Current year (2,342) (533) 161 – – (2,019) (46) (593) (5,372)

Prior year 10 (12,528) – – – 1,187 (4) 9,871 (1,464)

Other comprehensive income:

Available-for-sale investment – – – 12,772 – – – – 12,772

Cash flow hedges – – – – (866) – – – (866)

Actuarial losses 10,898 – – – – – – – 10,898

Foreign exchange and other adjustments (1,250) (1,524) (3) 12,077 353 (1,688) 1 (13,811) (5,845)

Total 7,316 (14,585) 158 24,849 (513) (2,520) (49) (4,533) 10,123

Asset – – 196 456 – 5,173 – 7,620 13,445

Liabilities 20,674 (38,461) (64) 27,465 (3,390) (228) (11,441) (828) (6,273)

At 31 December 20,674 (38,461) 132 27,921 (3,390) 4,945 (11,441) 6,792 7,172

Retirement benefits

Loan impairmentallowances

Acceleratedcapital

allowances

Available-for-sale

investmentsCash flow

hedgesshare-based

paymentsRevaluation of property Other Total

CHF 000 2009

Assets 41,322 (23,984) (244) 126,721 576 2,881 (8,770) 11,271 149,773

Liabilities – – – – – – – – –

At 1 January 41,322 (23,984) (244) 126,721 576 2,881 (8,770) 11,271 149,773

Income statement:

Current year (1,796) 149 202 8,792 – 853 (45) (14,801) (6,646)

Prior year 494 (51) – – – – (4) (1,839) (1,400)

Other comprehensive income:

Available-for-sale investment – – – (117,750) – – – – (117,750)

Cash flow hedges – – – – (3,611) – – – (3,611)

Actuarial losses (25,331) – – – – – – – (25,331)

Foreign exchange and other adjustments (1,331) 10 16 (14,691) 158 3,731 (2,573) 16,694 2,014

Total (27,964) 108 218 (123,649) (3,453) 4,584 (2,622) 54 (152,724)

Asset 233 121 171 (11) – 6,943 – 8,328 15,785

Liabilities 13,125 (23,997) (197) 3,083 (2,877) 522 (11,392) 2,997 (18,736)

At 31 December 13,358 (23,876) (26) 3,072 (2,877) 7,465 (11,392) 11,325 (2,951)

Deferred taxation Movement of net deferred tax assets before offsetting balances within countries:



8. Analysis of financial assets and liabilities by measurement basis

Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The principal accounting policies in Note 2 describe how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised.

The following table analyses the carrying amount of the financial assets and liabilities in the balance sheet by the class of financial instrument to which they are assigned, and therefore by the measurement basis:

held for trading

held-to-maturity

securitiesLoans and

receivables

Available-for-sale

securities

Financial assets and

liabilities at amortised

cost

Derivatives designated

as fair value hedging

instruments


as cash flow hedging

instruments Total

CHF 000 At 31 December 2010

Assets

Cash and balances at central banks – – – – 614,705 – – 614,705

Items in the course of collection from other banks – – – – 612 – – 612

Trading assets 431,969 – – – – – – 431,969

Derivatives 897,070 – – – – 6,094 66,150 969,314

Loans and advances to banks – – 9,779,681 – – – – 9,779,681

Loans and advances to customers – – 30,933,307 – – – – 30,933,307

Financial investments – 6,203,383 – 37,903,009 – – – 44,106,392

Financial investments which may be repledged or resold by counterparties

– – – 670,811 – – – 670,811

Other assets – – – – 238,309 – – 238,309

Accrued income – – – – 342,884 – – 342,884

Total financial assets 1,329,039 6,203,383 40,712,988 38,573,820 1,196,510 6,094 66,150 88,087,984

Total non-financial assets 693,120

Total assets 1,329,039 6,203,383 40,712,988 38,573,820 1,196,510 6,094 66,150 88,781,104

Liabilities

Deposits by banks – – – – 3,908,281 – – 3,908,281

Customer accounts – – – – 76,474,545 – – 76,474,545

Items in the course of transmission to other banks – – – – 32,496 – – 32,496

Derivatives 948,938 – – – – 200,951 25,960 1,175,849

Debt securities in issue – – – – – – – –

Other liabilities – – – – 100,831 – – 100,831

Accruals – – – – 353,470 – – 353,470

Total financial liabilities 948,938 – – – 80,869,623 200,951 25,960 82,045,472

Total non-financial liabilities 377,403

Total liabilities 948,938 – – – 80,869,623 200,951 25,960 82,422,875

held for trading

held-to-maturity

securitiesLoans and

receivables

Available-for-sale

securities

Financial assets and

liabilities at amortised

cost


as fair value hedging

instruments


as cash flow hedging

instruments Total


Assets

Cash and balances at central banks – – – – 100,089 – – 100,089

Items in the course of collection from other banks – – – – 5,750 – – 5,750

Trading assets 463,612 – – – – – – 463,612

Derivatives 1,018,333 – – – – 3,911 90,270 1,112,514

Loans and advances to banks – – 20,990,758 – – – – 20,990,758

Loans and advances to customers – – 30,222,254 – – – – 30,222,254

Financial investments – 8,087,048 – 37,071,974 – – – 45,159,022

Financial investments which may be repledged or resold by counterparties

– – – – – – – –

Other assets – – – – 205,210 – – 205,210

Accrued income – – – – 330,262 – – 330,262

Total financial assets 1,481,945 8,087,048 51,213,012 37,071,974 641,311 3,911 90,270 98,589,471

Total non-financial assets 741,310

Total assets 1,481,945 8,087,048 51,213,012 37,071,974 641,311 3,911 90,270 99,330,781

Liabilities

Deposits by banks – – – – 2,847,785 – – 2,847,785

Customer accounts – – – – 87,333,811 – – 87,333,811

Items in the course of transmission to other banks – – – – 4,168 – – 4,168

Derivatives 962,622 – – – – 292,689 57,269 1,312,580

Debt securities in issue – – – – 22 – – 22

Other liabilities – – – – 31,436 – – 31,436

Accruals – – – – 413,115 – – 413,115

Total financial liabilities 962,622 – – – 90,630,337 292,689 57,269 91,942,917

Total non-financial liabilities 540,299

Total liabilities 962,622 – – – 90,630,337 292,689 57,269 92,483,216



9. Reclassification of financial assets 10. Trading assets

11. Derivatives

Derivatives are financial instruments that derive their value in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risks. The group makes markets in derivatives for its customers and uses derivatives to manage its exposure to credit and market risks.

Derivatives are carried at fair value and shown in the balance sheet as separate totals of assets and liabilities. Asset values represent the cost to the group of replacing all transactions with a fair value in the group’s favour, assuming that all the group’s relevant counterparties default at the same time and that transactions can be replaced instantaneously. Liability values represent the cost to the group’s counterparties of replacing all their transactions with the group with a fair value in their favour if the group were to default.

A. Use of derivativesThe group transacts derivatives for three primary purposes: to create risk management solutions for clients, to manage the portfolio risks arising from client business and to manage and hedge the group’s own risks. For accounting purposes, derivative instruments are classified as held either for trading or hedging. Derivatives that are held as hedging instruments are formally designated as hedges as defined in IAS 39. All other derivative instruments are classified as held for trading. The held for trading classification includes two types of derivative instruments: those used in sales and trading activities, and those used for risk management purposes but which for various reasons do not meet the qualifying criteria for hedge accounting. The second type of held for trading instruments includes derivatives managed in conjunction with financial instruments designated at fair value. These activities are described more fully below.

The group’s derivative activities give rise to significant open positions in portfolios of derivatives. These positions are managed constantly to ensure that they remain within acceptable risk levels, with offsetting deals being utilised to achieve this where necessary. When entering into derivative transactions, the group employs the same credit risk management procedures to assess and approve potential credit exposures as are used for traditional lending.

The reclassifications were made as a result of significant reduction in market liquidity for these assets, and a change in the group’s intention to hold the assets for the foreseeable future or the maturity. These circumstances form part of the wider context of market turmoil and are considered a rare event and, as such, the reclassification was permitted under the amendment to IAS 39. On the date of reclassification, the fair value of the asset was deemed to be the asset’s new amortised cost, and the asset was thereafter tested for impairment.

Carrying amount Fair value

Carrying amount Fair value

CHF 000 At 31 December 2010 At 31 December 2009

Reclassification to held-to-maturity

Financial investments 6,203,383 6,591,415 8,086,019 8,727,155

Total 6,203,383 6,591,415 8,086,019 8,727,155

Effect on other comprehensive income

Fair value gain on other

comprehensive income

Assuming no reclassification

Net effect of reclassification

Fair value loss on other

comprehensive income

Assuming no reclassification

Net effect of reclassification

CHF 000 2010 2009

Reclassification to held-to-maturity

Financial investments 200,114 (12,390) 212,504 (828,254) (207,938) (620,316)

Total 200,114 (12,390) 212,504 (828,254) (207,938) (620,316)

CHF 000 2010 2009

Trading assets

Not subject to repledge or resale by counterparties 431,969 463,612

Total 431,969 463,612

Debt securities 20,630 29,416

Equity securities 676 207

subtotal 21,306 29,623

Loans and advances to banks 410,663 433,989

subtotal 410,663 433,989

Total 431,969 463,612



12. hedging derivatives

The group uses derivatives (principally interest rate swaps) for hedging purposes in the management of its own asset and liability portfolios and structural positions. This enables the group to mitigate the market risk which would otherwise arise from structural imbalances in the maturity and other profiles of its assets and liabilities.

The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and the type of hedge transactions. Derivatives may qualify as hedges for accounting purposes if they are fair value hedges, or cash flow hedges. These are described under the relevant headings below.

Notional contract amounts of derivatives held for hedging purposes, by product type:

The notional or contractual amounts of interest rate contracts indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

A. Fair value hedgesThe group’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate, long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are recognised in income. If the hedge relationship is terminated, the fair value adjustment to the hedged item continues to be reported as part of the basis of the item and is amortised to income as a yield adjustment over the remainder of the hedging period.

The fair values of outstanding derivatives designated as fair value hedges at 31 December 2010, were assets of CHF 6.1 million (2009: CHF 3.9 million) and liabilities of CHF 201.0 million (2009: CHF 292.7 million).

Gains or losses arising from the change in fair value of fair value hedges:

B. Trading derivativesMost of the group’s derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative products to customers to enable them to take, transfer, modify or reduce current or expected risks. Trading activities in derivatives are entered into principally for the purpose of generating profits from short-term fluctuations in price or margin. Positions may be traded actively or be held over a period of time to benefit from expected changes in currency rates, interest rates, equity prices or other market parameters. Trading includes positioning and arbitrage activities. Positioning means managing market risk positions in the expectation of benefiting from favourable movements in prices, rates or indices; arbitrage involves identifying and profiting from price differentials between markets and products.

As mentioned above, other derivatives classified as held for trading include non-qualifying hedging derivatives and the components of hedging derivatives that are excluded from assessing hedge effectiveness. Non-qualifying hedging derivatives are entered into for risk management purposes but do not meet the criteria for hedge accounting.

Notional contract amounts of derivatives held for trading purposes, by product type:

The notional or contractual amounts of these instruments indicate the nominal value of transactions outstanding at the balance sheet date; they do not represent amounts at risk.

Fair values of derivative open positions held by the group, by product contract type:

CHF 000 2010 2009

Foreign exchange 68,971,215 82,638,438

Interest rate 2,545,851 1,980,507

Equities 3,895,870 3,426,267

Commodities and other contracts 4,916,672 4,764,047

Total derivatives 80,329,608 92,809,259

CHF 000 2010 2009

Gains/(losses)

On hedging instruments (18,987) (22,679)

On the hedged items attributable to the hedged risk 18,877 22,964

(110) 285

Assets Liabilities

Trading hedging Total Trading hedging Total


Foreign exchange 631,964 – 631,964 (682,911) – (682,911)

Interest rate 68,320 72,244 140,564 (82,630) (226,911) (309,541)

Equities 107,345 – 107,345 (107,345) – (107,345)

Commodities and other contracts 89,441 – 89,441 (76,052) – (76,052)

Total fair values 897,070 72,244 969,314 (948,938) (226,911) (1,175,849)

At 31 December 2009

Foreign exchange 808,675 – 808,675 (742,818) – (742,818)

Interest rate 31,332 94,181 125,513 (47,332) (349,958) (397,290)

Equities 101,919 – 101,919 (101,919) – (101,919)

Commodities and other contracts 76,407 – 76,407 (70,553) – (70,553)

Total fair values 1,018,333 94,181 1,112,514 (962,622) (349,958) (1,312,580)

Cash flow hedge

Fair value hedge

Cash flow hedge

Fair value hedge


Interest rate contracts 2,481,337 5,847,370 2,739,998 7,740,133



13. Financial investments

14. Interests in associates

B. Cash flow hedgesThe group is exposed to variability in future interest cash flows on non-trading assets and liabilities which bear interest at variable rates or which are expected to be re-funded or reinvested in the future. The amounts and timing of future cash flows, representing both principal and interest flows, are projected for each portfolio of financial assets and liabilities on the basis of their contractual terms and other relevant factors, including estimates of prepayments and defaults. The aggregate principal balances and interest cash flows across all portfolios over time form the basis for identifying gains and losses on the effective portions of derivatives designated as cash flow hedges of forecast transactions. These are initially recognised directly in other comprehensive income as gains or losses not recognised in the income statement and are transferred to current period earnings when the forecast cash flows affect net profit and loss.

At 31 December 2010, the fair values of outstanding derivatives designated as cash flow hedges of forecast transactions were assets of CHF 66.2 million (2009: CHF 90.3 million) and liabilities of CHF 26.0 million (2009: CHF 57.3 million).

Cash flow periods Forecast principal balances on which interest cash flows are expected to arise:

The gains and losses on ineffective portions of such derivatives are recognised immediately in ”Net trading income”. At 31 December 2010, gains recognised due to hedge effectiveness were CHF 4.9 million (2009: loss of CHF 3.3 million).

3 months or less

More than 3 months

but less than 1 year

5 years or less but more

than 1 year3 months

or less

More than 3 months

but less than 1 year

5 years or less but more

than 1 year


Cash inflows from assets 1,995,651 1,965,221 1,439,490 1,709,494 1,709,494 1,687,787

Cash outflows from liabilities (485,686) (485,686) (112,286) (1,030,504) (1,030,504) (867,408)

Net cash inflows 1,509,965 1,479,535 1,327,204 678,990 678,990 820,379

Carrying value Fair value Carrying value Fair value

CHF 000 2010 2009

Treasury and other eligible bills: 6,584,091 6,584,091 1,658,915 1,658,915

Available-for-sale 6,584,091 6,584,091 1,658,915 1,658,915

Debt securities: 38,090,639 38,478,671 43,282,391 43,903,707

Available-for-sale 31,887,256 31,887,256 35,196,343 35,196,343

Held-to-maturity 6,203,383 6,591,415 8,087,048 8,707,364

Equity securities: 102,473 102,473 216,716 216,716

Available-for-sale 102,473 102,473 216,716 216,716

Total financial investments 44,777,203 45,165,235 45,159,022 45,779,338

Domicile Activity share capitalInterest

held in %Interest

held in %

CHF 000 2010 2009

Unlisted

Winter Finanz AG Zug Finance company 2,000 40.0 40.0

CHF 000 2010 2009

Financial investments:

Which may be pledged or resold by counterparties 670,811 –

Not subject to repledge or resale by counterparties 44,106,392 45,159,022

44,777,203 45,159,022



15. Goodwill and intangible assets

“Goodwill and intangible assets” includes goodwill arising on business combinations and other intangible assets.

A. Goodwill Goodwill for the years ended 31 December 2010 and 31 December 2009 were as follows:

During 2010, no goodwill impairment was recognised (2009: nil). Impairment testing in respect of goodwill is performed annually by comparing the recoverable amount of cash-generating units (CGUs) determined as based on a value-in-use calculation. That calculation uses cash flow estimates based on management’s cash flow projections, extrapolated in perpetuity using a nominal long-term growth rate based on current market assessments of GDP and inflation for the countries within which the CGU operates. Cash flows are extrapolated in perpetuity due to the long-term perspective within the group of the business units making up the CGUs. The discount rate used is based on the cost of capital the group allocates to investments in the countries within which the CGU operates.

The cost of capital assigned to an individual cash-generating unit and used to discount its future cash flows can have a significant effect on its valuation. The cost of capital percentage is generally derived from an appropriate capital asset pricing model, which itself depends on inputs reflecting a number of financial and economic variables including the risk-free rate in the country concerned and a premium or discount to reflect the inherent risk of the business being evaluated. These variables are established on the basis of management judgment and current market assessments of economic variables.

Management judgment is required in estimating the future cash flows of the cash-generating units. These values are sensitive to the cash flows projected for the periods for which detailed forecasts are available, and to assumptions regarding the long-term sustainable pattern of cash flows thereafter. While the acceptable range within which underlying assumptions can be applied is governed by the requirement for resulting forecasts to be compared with actual performance and verifiable economic data in future years, the cash flow forecasts necessarily and appropriately reflect management’s view of future business prospects.

The group’s goodwill is attributed to the Private Banking CGU. The following assumptions were used when testing the goodwill for impairment:

Discount rate: 11%

Nominal growth rate beyond initial cash flow projections: 5%

CHF 000 2010 2009

Cost

At 1 January 313,784 82,988

Additions – 243,115

Exchange differences (28,069) (12,319)

At 31 December 285,715 313,784

Accumulated impairment losses – –

Net carrying amount at 31 December 285,715 313,784

B. Intangible assetsThe analysis of the movement of intangible assets for the year ended 31 December 2010 was as follows:

The analysis of the movement of intangible assets for the year ended 31 December 2009 was as follows:

The amortisation charge for the year is recognised within the income statement under “Amortisation of intangible assets and impairment of goodwill”.

Intangible assets are stated at cost less any accumulated amortisation and impairment losses and are amortised using the straight-line method over their useful lives. Estimated useful life is the lower of legal duration and the expected economic life.

Internally generated software

Purchased software

Customer / merchant

relationships Total

CHF 000 2010

Cost

At 1 January 2010 7,009 223 3,028 10,260

Additions – 266 – 266

Exchange differences (228) (46) (298) (572)

At 31 December 2010 6,781 443 2,730 9,954

Accumulated amortisation

At 1 January 2010 (6,641) (201) (881) (7,723)

Charge for the year (370) (29) (202) (601)

Exchange differences 230 22 109 361

At 31 December 2010 (6,781) (208) (974) (7,963)

Net carrying amount at 31 December 2010 – 235 1,756 1,991

Internally generated software

Purchased software

Customer / merchant

relationships Total

CHF 000 2009

Cost

At 1 January 2009 7,095 231 3,088 10,414

Exchange differences (86) (8) (60) (154)

At 31 December 2009 7,009 223 3,028 10,260

Accumulated amortisation

At 1 January 2009 (5,926) (158) (690) (6,774)

Charge for the year (795) (51) (211) (1,057)

Exchange differences 80 8 20 108

At 31 December 2009 (6,641) (201) (881) (7,723)

Net carrying amount at 31 December 2009 368 22 2,147 2,537



16. Property & equipment

Freehold land and buildings

short lease-hold land

and buildings1

Equipment, fixtures and

fittings Total

CHF 000 2010

Cost or deemed cost

At 1 January 2010 90,945 108,438 158,135 357,518

Additions at cost 163 27,723 12,355 40,241

Disposals – (5,830) (4,982) (10,812)

Transfers – – (119) (119)

Exchange differences (1,102) (8,271) (5,165) (14,538)

At 31 December 2010 90,006 122,060 160,224 372,290

Accumulated depreciation

At 1 January 2010 (11,965) (52,855) (114,726) (179,546)

Depreciation charge for the year (1,723) (12,655) (16,364) (30,742)

Disposals – 5,830 4,197 10,027

Exchange differences 163 1,349 4,133 5,645

At 31 December 2010 (13,525) (58,331) (122,760) (194,616)

Net carrying amount at 31 December 2010 76,481 63,729 37,464 177,674

Freehold land and buildings

short lease-hold land

and buildings1

Equipment, fixtures and

fittings Total

CHF 000 2009

Cost or deemed cost

At 1 January 2009 116,321 99,392 159,839 375,552

Additions at cost 793 10,651 12,534 23,978

Disposals (25,423) (1,078) (13,470) (39,971)

Exchange differences (746) (550) (768) (2,064)

Other changes – 23 – 23

At 31 December 2009 90,945 108,438 158,135 357,518


At 1 January 2009 (16,533) (41,331) (110,294) (168,158)

Depreciation charge for the year (2,283) (12,631) (18,226) (33,140)

Disposals 7,016 1,088 13,859 21,963

Exchange differences (166) 18 (65) (213)

Other changes 1 1 – 2

At 31 December 2009 (11,965) (52,855) (114,726) (179,546)

Net carrying amount at 31 December 2009 78,980 55,583 43,409 177,972

CostAccumulated depreciation Cost


CHF 000 2010 2009

At 1 January 80,122 (36,695) 68,541 (26,177)

Additions 32,771 – 12,177 –

Disposals (5,830) 5,830 (263) 263

Depreciation charge for the year – (11,618) – (10,376)

Exchange differences (8,711) (4,096) (333) (405)

At 31 December 98,352 (46,579) 80,122 (36,695)

Net carrying amount at 31 December 51,773 43,427

Country of incorporation

or registration

hsBC Private Banking holdings

(suisse) sA interest in

equity capital % Issued equity

capital

2010

HSBC Private Bank (Suisse) SA Switzerland 100 CHF 708.5m

HSBC Private Bank (UK) Limited England 100 GBP 176.9m

HSBC Private Bank (C.I.) Limited Guernsey 100 USD 25m

HSBC Private Bank (Monaco) S.A. Monaco 100 EUR 151m

PBBS Ltd Nassau 100 USD 5m

1 Included in the short leasehold land and buildings are assets held on finance leases with a net carrying amount of CHF 12.0 million (2009: CHF 12.2 million), on which the accumulated depreciation as at 31 December 2010 was CHF 11.8 million (2009: CHF 16.2 million).

17. Investments in subsidiaries

Principal subsidiary undertakings of HSBC Private Banking Holdings (Suisse) SA are listed below.

Included in “Short leasehold land and buildings” were the following amounts in respect of assets classified as improvements to buildings, which were carried at depreciated historical cost:

All of these subsidiaries make their financial statements up to 31 December.



18. Other assets

19. Other liabilities

20. Provisions

CHF 000 2010 2009

Disposal groups and non-current assets held for sale

Property and equipment1 1,547 1,839

Total assets classified as held for sale 1,547 1,839

CHF 000 2010 2009

Bullion 142,726 149,806

Assets held for sale 1,547 1,839

Current taxation recoverable 1 3,882

Endorsements and acceptances 6,292 2,879

Other accounts 108,483 128,380

263,710 301,458

CHF 000 2010 2009

Share-based payment obligations 129,258 147,830

Obligations under finance leases 19,677 22,369

Endorsements and acceptances 6,292 2,879

Other liabilities 108,483 128,380

263,710 301,458

Obligations under finance leases falling due:

Within 1 year 620 609

Between 1 and 5 years 2,829 2,795

Over 5 years 16,228 18,965

19,677 22,369

CHF 000 2010 2009

At 1 January 26,892 39,705

Additional provisions/increase in provisions 28,885 3,164

Provisions utilised (9,456) (4,715)

Amounts reversed (9,127) (11,700)

Exchange differences and other movements 5,038 438

At 31 December 42,232 26,892

1 Included within property and equipment classified as held for sale is repossessed property that had been pledged as collateral by customers.

21. Fair value of financial instruments

The methods used to determine fair values of financial instruments for the purpose of measurement and disclosure are set out in Note 2. The majority of the group’s financial instruments measured at fair value are valued using quoted market prices, valuation techniques based on observable market data or valuation technique with significant non-observable market data.

Determination of fair value Fair values are determined according to the following hierarchy:

Level 1 – quoted market price: financial instruments with quoted prices for identical instruments in active markets.

Level 2 – valuation technique using observable inputs: financial instruments with quoted prices for similar instruments in active markets, or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable.

Level 3 – valuation technique with significant unobservable inputs: financial instruments valued using models where one or more significant inputs are unobservable.

Included in the above are provisions for potential client claims, regulatory fines and litigation payments of CHF 32.6 million (2009: CHF 17.2 million).

Assets held for sale

The best evidence of fair value is a quoted price in an actively traded market. The fair values of financial instruments that are quoted in active markets are based on bid prices for assets held and offer prices for liabilities issued. Where a financial instrument has a quoted price in an active market and it is part of a portfolio, the fair value of the portfolio is calculated as the product of the number of units and quoted price, and no block discounts are made. In the event that the market for a financial instrument is not active, a valuation technique is used.

The judgment as to whether a market is active may include, but is not restricted to, the consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads. The bid/offer spread represents the difference in prices at which a market participant would be willing to buy compared with the price at which the participant would be willing to sell. In inactive markets, obtaining assurance that the transaction price provides evidence of fair value or determining the adjustments to transaction prices that are necessary to measure the fair value of the instrument requires additional work during the valuation process.

The majority of valuation techniques employ only observable market data, and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that feature one or more significant market inputs that are unobservable, and for them, the derivation of fair value is more judgmental. An instrument in its entirety is classified as valued using significant unobservable inputs if, in the opinion of management, a significant proportion of the instrument’s carrying amount and/or inception profit (“day 1 gain and loss”) is driven by unobservable inputs. “Unobservable” in this context means that there is little or no current market data available from which to determine the level at which an arm’s length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).

Furthermore, in some cases the majority of the fair value derived from a valuation technique with significant unobservable inputs may be attributable to the observable inputs. Consequently, the effect of uncertainty in the determining unobservable inputs will generally be restricted to uncertainty about the overall fair value of the financial instrument being measured.



Bases of valuing financial assets and liabilities measured at fair valueThe following tables provide an analysis of the various bases described above which have been deployed for valuing financial assets and financial liabilities measured at fair value in the consolidated financial statements:

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy:

Valuation techniques

Level 1

Quoted market prices

Level 2

Using observable

inputs

Level 3

With significant unobservable

inputs Total


Assets

Trading assets – 21,306 410,663 431,969

Derivatives 131,392 834,184 3,738 969,314

Available-for-sale assets 18,573,879 19,999,941 – 38,573,820

Liabilities

Derivatives 40,234 1,131,877 3,738 1,175,849

Assets Liabilities

held for trading Derivatives Derivatives

CHF 000 2010

At 1 January 2010 433,989 2,614 2,614

Total gains/(losses) recognised in profit or loss 18,826 (2,797) (2,822)

Settlements – 74 74

Transfer in – 4,241 4,266

Exchange differences (42,152) (394) (394)

At 31 December 2010 410,663 3,738 3,738

Assets Liabilities

held for trading Derivatives Derivatives

CHF 000 2009

At 1 January 2009 – 111,582 111,582

Purchase – 936 82

Settlements – (177) (177)

Transfer out – (113,143) (113,143)

Transfer in 456,383 1,813 2,667

Exchange differences (22,394) 1,603 1,603

At 31 December 2009 433,989 2,614 2,614

Valuation techniques

Level 1

Quoted market prices

Level 2

Using observable

inputs

Level 3

With significant unobservable

inputs Total


Assets

Trading assets – 29,623 433,989 463,612

Derivatives 171,846 938,054 2,614 1,112,514

Available-for-sale assets 14,155,812 22,916,162 – 37,071,974

Liabilities

Derivatives 132,450 1,177,516 2,614 1,312,580



22. Maturity analysis of assets and liabilities

The following is an analysis of undiscounted cash flows payable under financial liabilities by remaining contractual maturities at the balance sheet date:

Fair values of financial instruments not carried at fair valueFair values at the balance sheet date of the assets and liabilities set out below are estimated for the purpose of disclosure as follows:

1. Loans and advances to banks and customers

The fair values of personal and commercial loans and advances are estimated by discounting anticipated expected cash flows (including interest at contractual rates).

Performing loans are grouped, as far as possible, into homogeneous pools segregated by maturity and the coupon rates of the loans within each pool. In general, cash flows are discounted using current market rates for instruments with similar maturity, repricing and credit risk characteristics. For fixed rate loans, assumptions are made on the expected prepayment rates appropriate to the type of loan.

For non-performing uncollateralised commercial loans, fair value is estimated by discounting the future cash flows over the time period they are expected to be recovered. For non-performing commercial loans where collateral exists, fair value is the lower of the carrying values of the loans net of impairment allowances, and the fair value of the collateral, discounted as appropriate.

2. Deposits by banks and customer accounts

Deposits by banks and customer accounts are grouped by residual maturity. Fair values are estimated using discounted cash flows, applying either market rates where applicable, or current rates offered for deposits of similar, remaining maturities.

3. Debt securities in issue

Fair values are determined by using quoted market prices at the balance sheet date where applicable, or by reference to quoted market prices for similar instruments.

The fair values presented in the table below are stated at a specific date and may be significantly different from the amounts which will actually be paid or received on the maturity or settlement dates of the instruments. In many cases, it would not be possible to realise immediately the estimated fair values. Accordingly these fair values do not represent the value of these financial instruments to the group as a going concern.

The fair values of intangible assets, such as values placed on portfolios of core funding and customer goodwill, are not included above because they are not financial instruments.

As other financial institutions use different valuation methodologies and assumptions in determining fair values, comparisons of fair values between financial institutions may not be meaningful and users are advised to exercise caution when using this data.

In addition, the following table lists those financial instruments where the carrying amount is a reasonable approximation of fair value, for example, because they are either short-term in nature or reprice to current market rates:

The following is an analysis, by remaining contractual maturities at the balance sheet date, of asset and liability line items that combine amounts expected to be recovered or settled in under one year, and after one year.

Contractual maturity is considered to be a reasonable approximation of expected maturity for the assets and liabilities analysed below. However, for items such as demand deposits and overdrafts, the contractual maturities could differ from expected maturities.

The undiscounted cash flows potentially payable under financial guarantee contracts are classified in accordance with the contractual cash flows of the financial instruments to which the guarantee relates.

Trading assets and liabilities are expected to be recovered or settled no more than twelve months after the balance sheet date, and therefore are excluded from this analysis.

Carrying value Fair value Carrying value Fair value

CHF 000 2010 2009

Assets

Loans and advances to banks 9,779,681 9,782,932 20,990,758 20,995,535

Loans and advances to customers 30,933,307 31,063,423 30,222,254 30,319,329

Financial investments: debt securities 6,203,383 6,591,415 8,086,019 8,706,335

Liabilities

Deposits by banks 3,908,281 3,909,279 2,847,785 2,848,870

Customer accounts 76,474,545 76,542,423 87,333,811 87,375,876

Debt securities in issue – – 22 22

Assets Liabilities

Cash and balances at central banks Items in the course of transmission

Items in the course of collection Endorsements and acceptances

Endorsements and acceptances Short-term payables within “Other Liabilities”

Short-term receivables within “Other Assets”

On demandDue within

3 monthsDue between

3 & 12 monthsDue between

1 & 5 yearsDue after

5 years Total


Deposits by banks 1,229,279 2,638,419 46,997 – – 3,914,695

Customer accounts 44,465,176 29,342,537 2,227,076 299,485 385,676 76,719,950

Other financial liabilities 3,382 345,333 88,873 109,641 30,389 577,618

45,697,837 32,326,289 2,362,946 409,126 416,065 81,212,263

Loan commitments 3,960,404 – – – – 3,960,404

Financial guarantee contracts 314,980 586,802 1,416,478 314,835 25,913 2,659,008

4,275,384 586,802 1,416,478 314,835 25,913 6,619,412

On demandDue within

3 monthsDue between

3 & 12 monthsDue between

1 & 5 yearsDue after

5 years Total


Deposits by banks 1,062,463 1,636,918 165,148 3,338 – 2,867,867

Customer accounts 49,012,471 32,258,119 3,311,249 115,251 304,194 85,001,284

Debt securities in issue 22 – – – – 22


50,079,280 34,293,027 3,538,466 313,375 342,015 88,566,163

Loan commitments 2,493,756 – – – – 2,493,756

Financial guarantee contracts 343,717 745,413 1,669,389 365,295 29,494 3,153,308

2,837,473 745,413 1,669,389 365,295 29,494 5,647,064



24. Assets charged as security for liabilities

Assets pledged to secure these liabilities are included under the following headings:

These transactions are conducted under terms that are usual and customary to standard lending, stock borrowing and lending activities.

25. Called up share capital

Authorised The authorised and issued ordinary share capital of HSBC Private Banking Holdings (Suisse) SA at 31 December 2010 and 2009 was CHF 1,363,330,000 divided into 1,363,330 ordinary shares of CHF 1,000 each.

26. Notes on the cash flow statement

A. Non-cash items included in profit before tax

Due within one year

Due after more than

one year TotalDue within

one year

Due after more than

one year Total


Assets

Loans and advances to banks 8,846,181 933,500 9,779,681 20,990,758 – 20,990,758

Loans and advances to customers 23,646,438 7,286,869 30,933,307 22,097,790 8,124,464 30,222,254

Financial investments 26,806,706 17,970,497 44,777,203 17,767,789 27,391,233 45,159,022

Other financial assets 241,208 63,540 304,748 203,839 87,145 290,984

59,540,533 26,254,406 85,794,939 61,060,176 35,602,842 96,663,018

Liabilities

Deposits by banks 3,908,281 – 3,908,281 2,847,785 – 2,847,785

Customer accounts 75,863,404 611,141 76,474,545 86,972,698 361,113 87,333,811

Debt securities in issue – – – 22 – 22


79,905,566 737,195 80,642,761 89,863,485 563,995 90,427,480

23. Foreign currency exposures

Net structural currency exposures The group’s structural foreign currency exposure is represented by the net asset value of its foreign currency equity and subordinated debt investments in subsidiary undertakings, branches, joint ventures and associates. Gains or losses on structural foreign currency exposures are taken to reserves.

The group’s net structural currency exposures as at the year-end were as follows:

CHF 000 2010 2009

Currency of structural exposure

Swiss francs 3,632,965 3,401,805

Pounds sterling 801,527 904,529

Euros 449,850 529,656

Hong Kong dollars 14,591 16,083

Singapore dollars 5,375 5,925

Total 4,904,308 4,857,998

CHF 000 2010 2009

Loans and advances to banks 578,770 637,980

Debt securities 1,269,803 47,260

1,848,573 685,240

CHF 000 2010 2009

Depreciation and amortisation 31,343 34,197

Loan impairment charges 32,315 31,645

Provisions raised 19,758 (8,536)

Provisions utilised (9,456) (4,715)

Impairment of financial investments 5,085 54,160

Charge of defined benefit pension schemes 25,157 31,082

Accretion of discounts and amortisation of premiums (49,164) (65,227)

55,038 72,606

B. Change in operating assets

CHF 000 2010 2009

Change in prepayments and accrued income (66,659) 161,844

Change in net trading securities and net derivatives 15,163 (1,080,551)

Change in loans and advances to banks 4,914,167 13,023,150

Change in loans and advances to customers (3,933,037) 234,229

Change in other assets (48,120) (31,864)

881,514 12,306,808



27. Risk management

All the HSBC’s activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risks or combinations of risks. The risk management framework is designed to foster the continuous monitoring of the risk environment and an integrated evaluation of risks and their interactions.

The most important risk categories that the group is exposed to are: credit risk, market risk, liquidity risk, operational risk and reputational risk. Market risk includes foreign exchange, interest rate and equity price risks. The strong risk governance of the group reflects the importance assigned by the Board to shaping the group’s risk strategy and managing risks effectively. It is supported by a clear policy framework of risk ownership that aligns business and risk objectives, and by the accountability of all officers for identifying, assessing and managing risks within the scope of their assigned responsibilities. This personal accountability, reinforced by the governance structure, experience and mandatory learning, helps to foster throughout HSBC a disciplined and constructive culture of risk management and control.

The management of all risks which are significant to the group is discussed below.

C. Change in operating liabilities

CHF 000 2010 2009

Change in accruals and deferred income (21,514) (135,297)

Change in deposits by banks 1,471,254 1,618,219

Change in customer accounts (3,058,394) (5,398,276)

Change in debt securities in issue (22) 2

Change in other liabilities 1,963 71,543

(1,606,713) (3,843,809)

D. Cash and cash equivalents

CHF 000 2010 2009

Cash and balances at central banks 614,705 100,089

Items in the course of collection from other banks 612 5,750

Loans and advances to banks of one month or less 7,380,072 13,467,932

Treasury bills, other bills and certificates of deposit less than three months 4,977,415 1,770,228

Less: items in the course of transmission to other banks (32,496) (4,168)

12,940,308 15,339,831

A. Credit risk managementCredit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally from direct lending, trade finance and treasury achievement, but also from off-balance sheet products such as guarantees and from the group’s holdings of debt securities. Of the risks in which the group engages, credit risk generates the largest regulatory capital requirements. The principal objectives of the group’s credit risk management are:

to maintain across the group a strong culture of responsible lending and a robust risk policy and control framework;

to both partner and challenge businesses in defining, implementing, and continually re-evaluating the group’s risk appetite under actual and scenario conditions; and

to ensure there is independent and expert scrutiny of credit risks, their costs and their mitigation.

Credit qualityThe group’s credit risk rating systems and processes differentiate exposures in order to highlight those with greater risk factors and higher potential severity of loss. In the case of individually significant accounts, risk ratings are reviewed regularly and amendments, where necessary, are implemented promptly. Within the group’s retail portfolios, risk is assessed and managed using a wide range of risk and pricing models to generate portfolio data.

The Credit Risk Review team reviews the robustness and effectiveness of key measurement, monitoring and control activities.

The group’s risk rating system facilitates the internal ratings-based (IRB) approach under Basel II adopted by the group to support calculation of our minimum credit regulatory capital requirement. For further details, see “Credit quality of financial instruments” on page 66.



Maximum exposure to credit riskThe following table presents the maximum exposure to credit risk from balance sheet and off-balance sheet financial instruments, before taking account of any collateral held or other credit enhancements (unless such credit enhancements meet offsetting requirements). For financial assets recognised on the balance sheet, the maximum exposure to credit risk equals their carrying amount. For financial guarantees granted, the maximum exposure to credit risk is the maximum amount that the group would have to pay if the guarantees were called upon. For loan commitments and other credit-related commitments that are irrevocable over the life of the respective facilities, it is generally the full amount of the committed facilities.

Loans and advances Although collateral can be an important mitigant of credit risk, it is the group’s policy to lend on the basis of the customer’s capacity to repay rather than rely on the value of security offered. Depending on the customer’s standing and the type of product, facilities may be provided unsecured. The principal collateral types employed by the group are as follows:

in the personal sector: mortgages over residential properties;

in the commercial and industrial sector: charges over business assets such as premises, stock and debtors;

in the commercial real estate sector: charges over the properties being financed; and

in the financial sector: charges over financial instruments such as debt securities and equities in support of trading facilities.

The loans and advances offset adjustment in the table above primarily relates to customer loans and deposits, and balances arising from repo and reverse repo transactions. The offset relates to balances where there is a legally enforceable right of offset in the event of counterparty default, and where, as a result, there is a net exposure for credit risk management purposes. However, as there is no intention to settle these balances on a net basis under normal circumstances, they do not qualify for net presentation for accounting purposes.

The group does not disclose the fair value of collateral held as security or other credit enhancements on loans and advances past due but not impaired, or on individually assessed impaired loans and advances, as it is not practicable to do so.

Concentrations of credit risk exposureConcentrations of credit risk arise when a number of counterparties or exposure have comparable economic characteristics, or such counterparties are engaged in similar activities, or operate in the same geographical areas or industry sectors, so that their collective ability to meet contractual obligations is uniformly affected by changes in economic, political or other conditions.

The group provides a diverse range of financial services both in Switzerland and internationally. As a result, its portfolio of financial instruments with credit risk is diversified.

Loans and advances to customers by industry sector

Collateral and other credit enhancements Collateral held against financial instruments presented above in the maximum exposure to credit risk table is described in more detail below.

Items in the course of collection from other banksSettlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for counterparties to cover the aggregate of the group’s transactions with each one on any single day. Settlement risk on many transactions, particularly those involving securities and equities, is substantially mitigated by settling through assured payment systems, or on a delivery-versus-payment basis.

Treasury, other eligible bills and debt securities Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, except for ABSs and similar instruments, which are secured by pools of financial assets.

DerivativesThe International Swaps and Derivatives Association (ISDA) Master Agreement is the group’s preferred agreement for documenting derivatives activity. It provides the contractual framework within which dealing activity across a full range of over-the-counter products is conducted, and contractually binds both parties to apply close-out netting across all outstanding transactions covered by an agreement if either party defaults or other pre-agreed termination events occur. It is common, and the group’s preferred practice, for the parties to execute a Credit Support Annex (CSA) in conjunction with the ISDA Master Agreement. Under a CSA, collateral is passed between the parties to mitigate the market-contingent counterparty risk inherent in the outstanding positions.

Maximum exposure Offset

Exposure to credit risk (net)

Maximum exposure Offset

Exposure to credit risk (net)

CHF 000 2010 2009

Cash and balances at central banks 614,705 – 614,705 100,089 – 100,089

Items in course of collection from other banks 612 – 612 5,750 – 5,750

Trading assets:

Debt securities 20,630 – 20,630 29,416 – 29,416

Loans and advances to banks 410,663 – 410,663 433,989 – 433,989

Derivatives 969,314 – 969,314 1,112,514 – 1,112,514

Loans and advances to banks 9,779,681 – 9,779,681 20,990,758 – 20,990,758

Loans and advances to customers 30,933,307 (485,798) 30,447,509 30,222,254 (553,213) 29,669,041


Treasury and other eligible bills 6,584,091 – 6,584,091 1,658,915 – 1,658,915

Debt securities 38,090,639 – 38,090,639 43,283,391 – 43,283,391

Other assets:

Endorsements and acceptances 6,292 – 6,292 2,879 – 2,879

Accrued income and other assets 574,901 – 574,901 532,593 – 532,593

Financial guarantees 2,659,008 – 2,659,008 3,153,308 – 3,153,308

Loan commitments and other credit related commitments 3,960,404 – 3,960,404 2,493,756 – 2,493,756

At 31 December 94,604,247 (485,798) 94,118,449 104,019,612 (553,213) 103,466,399

Gross loansand advances to customers

ChF 000

Gross loansby industry

sector as a % of total gross loans

Gross loansand advances to customers

ChF 000

Gross loansby industry

sector as a % of total gross loans

2010 2009

Personal

Residential mortgages 4,174,340 13.4 5,021,759 16.6

Other personal lending 18,985,140 61.2 17,128,434 56.5

Total 23,159,480 74.6 22,150,193 73.1

Corporate and commercial

Commercial and industrial 2,519,200 8.1 2,462,754 8.1

Commercial real estate 3,091,847 10.0 3,454,142 11.4

Other property-related 360,412 1.2 529,955 1.7

Other 590,300 1.9 334,991 1.1

Total 6,561,759 21.2 6,781,842 22.3

Financial

Financials 859,914 2.7 858,668 2.8

Settlement accounts 459,807 1.5 527,715 1.8

Total 1,319,721 4.2 1,386,383 4.6

Total gross loans and advances to customers 31,040,960 100.0 30,318,418 100.0



Credit quality of financial instrumentsThe five classifications below describe the credit quality of the group’s four categories of financial instruments, namely lending, debt securities portfolios, and derivatives. These categories each encompass a range of more granular, internal credit rating grades assigned to corporate and personal lending business, as well as the external ratings attributed by external agencies to debt securities. There is no direct correlation between the internal and external ratings at granular level, except insofar as both fall within one of the four classifications.

Credit quality of the group’s lending, debt securities and other bills

Corporate lending and derivatives Personal lending Debt securities/ other

Internal credit rating

Probability of default %

Internal credit rating Expected loss %

External credit rating

2010

Quality classification

Strong CRR1 to CRR2 0 - 0.169 EL1 to EL2 0 - 0.999 A- and above

Medium – Good CRR3 0.170 - 0.740 EL3 1.000 - 4.999 BBB+ to BBB-

Medium – Satisfactory CRR4 to CRR5 0.741 - 4.914 EL4 to EL5 5.000 - 19.999 BB+ to B+ and unrated

Sub-standard CRR6 to CRR8 4.915 - 99.999 EL6 to EL8 20.000 - 99.999 B and below

Impaired CRR9 to CRR10 100 EL9 to EL10 100+ or defaulted 1 Impaired

Neither past-due nor impaired

strongMedium –

GoodMedium –

satisfactory sub-standardPast-due but not impaired Impaired

Impairment allowances Total


Cash and balances at central banks 614,705 – – – – – – 614,705

Items in course of collection from other banks 612 – – – – – – 612

Trading assets:

Debt securities 20,630 – – – – – – 20,630

Loans and advances to banks 410,663 – – – – – – 410,663

Derivatives 616,556 55,968 296,790 – – – – 969,314

Loans and advances held at amortised cost:

Loans and advances to banks 9,478,385 296,062 841 131 – 4,262 – 9,779,681

Loans and advances to customers 12,651,787 12,028,770 5,332,636 640,448 – 387,319 (107,653) 30,933,307


Treasury and other similar bills 6,584,091 – – – – – – 6,584,091

Debt securities 37,276,214 562,336 251,998 91 – – – 38,090,639

Other assets:

Endorsements and acceptances – 6,292 – – – – – 6,292

Other 377,549 24,840 172,261 205 – 46 – 574,901

Neither past-due nor impaired

strongMedium –

GoodMedium –

satisfactory sub-standardPast-due but not impaired Impaired

Impairment allowances Total


Cash and balances at central banks 100,089 – – – – – – 100,089

Items in course of collection from other banks 5,750 – – – – – – 5,750

Trading assets:

Debt securities 29,416 – – – – – – 29,416

Loans and advances to banks 433,989 – – – – – – 433,989

Derivatives 682,090 72,123 358,171 130 – – – 1,112,514

Loans and advances held at amortised cost:

Loans and advances to banks 19,919,805 1,026,949 38,603 – – 5,401 – 20,990,758

Loans and advances to customers 13,226,979 12,119,684 3,881,793 896,535 – 193,427 (96,164) 30,222,254


Treasury and other similar bills 1,658,915 – – – – – – 1,658,915

Debt securities 42,383,311 884,635 15,445 – – – – 43,283,391

Other assets:

Endorsements and acceptances – 2,879 – – – – – 2,879

Other 331,329 109,215 86,436 1,088 – 4,703 – 532,771

Quality classification definitions

Strong: exposures demonstrate a strong capacity to meet financial commitments, with negligible or low probability of default and/or low levels of expected loss. Personal accounts operate within product parameters and only exceptionally show any period of delinquency.

Medium – Good: exposures require closer monitoring and demonstrate a good capacity to meet financial commitments, with low default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minimal following the adoption of recovery processes.

Medium – Satisfactory: exposures require closer monitoring and demonstrate an average to fair capacity to meet financial commitments, with moderate default risk. Retail accounts typically show only short periods of delinquency, with any losses expected to be minor following the adoption of recovery processes.

Sub - standard: exposures require varying degrees of special attention and default risk is of greater concern. Personal portfolio segments show longer delinquency periods of generally up to 90 days past due and/or expected losses are higher due to a reduced ability to mitigate these through security realisation or other recovery processes.

Impaired: exposures have been assessed, individually or collectively, as impaired.

Risk rating scales The Customer Risk Rating (CRR) 10-grade scale above summarises a more granular, underlying 22-grade scale of obligor probability of default (PD). All distinct customers group-wide are rated using one of these two PD scales, depending on the degree of sophistication of the Basel II approach adopted for the exposure.

The Expected Loss (EL) 10-grade scale for Personal business summarises a more granular underlying EL scale for these customer segments; this combines obligor and facility/product risk factors in a composite measure.

For debt securities and certain other financial instruments, external ratings have been aligned to the five quality classifications. The ratings of Standard and Poor’s are cited, with those of other agencies being treated equivalently. Debt securities with short-term issue ratings are reported against the long-term rating of the issuer of those securities. If major rating agencies have different ratings for the same debt securities, a prudent rating selection is made in line with regulatory requirements.

For the purpose of the following disclosure, personal loans which are past due up to 89 days and are not otherwise classified as EL9 or EL10 are separately classified as past due but not impaired.

Distribution of financial instruments by credit qualityThe following tables set out the distribution of financial instruments by measures of credit quality:

1 The EL percentage is derived through a combination of PD and LGD and may exceed 100% in circumstances where the LGD is above 100% reflecting the cost of recoveries.



Impaired loans and advances to customers and banks by industry sector

Impaired loans and advances

Individuallyassessed

Collectivelyassessed Total


Collectivelyassessed Total


Banks 4,262 – 4,262 5,401 – 5,401

Customers 387,319 – 387,319 193,427 – 193,427

Personal 298,503 – 298,503 158,723 – 158,723

Commercial and corporate 88,816 – 88,816 34,704 – 34,704

391,581 – 391,581 198,828 – 198,828

Impairment allowances and charges on loans and advances to customers

The table below analyses the impairment allowances recognised for impaired loans and advances that are either individually assessed or collectively assessed, and collective impairment allowances on loans and advances classified as not impaired.

The group obtained assets by taking possession of collateral held as security, or by calling upon other credit enhancements. Repossessed properties are made available for sale in orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness. If excess funds arise after the debt has been repaid, they are made available either to repay other secured lenders with lower priority or are returned to the customer. The group does not generally occupy the repossessed properties for its business use.

Collateral and other credit enhancements obtained

CHF 000At 31 December 2010

At 31 December 2009

Gross loans and advances

Individually assessed impaired loans1 387,319 193,427

Collectively assessed2

Non-impaired loans3 30,653,641 30,124,991

Total gross loans and advances 31,040,960 30,318,418

Impairment allowances

Individually assessed 80,793 73,351

Collectively assessed 26,860 22,813

Total impairment allowances 107,653 96,164

%

Individually assessed allowances as a % of individually assessed impaired loans and advances 20.9 37.9

Collectively assessed allowances as a % of collectively assessed loans and advances 0.1 0.1

CHF 000 2010 2009

Nature of assets

Residential property 1,547 1,839

1,547 1,839 1 Impaired loans and advances are those classified as CRR9, CRR10, EL9 or EL10, and all retail loans 90 days or more past due.2 Collectively assessed loans and advances comprise homogeneous groups of loans that are not considered individually significant, and loans subject to individual assessment where no impairment has been identified

on an individual basis, but on which a collective impairment allowance has been calculated to reflect losses which have been incurred but not yet identified.3 Collectively assessed loans and advances not impaired are those classified as CRR1 to CRR8 and EL1 to EL8, but excluding retail loans 90 days past due.



Impairment allowances on loans and advances to customers by industry sector


allowances

Collectivelyassessed

allowancesTotal

allowances


allowances

Collectivelyassessed

allowancesTotal

allowances


Customers

Personal 77,732 26,860 104,592 61,070 22,813 83,883

Commercial and corporate 3,061 – 3,061 12,281 – 12,281

80,793 26,860 107,653 73,351 22,813 96,164

Individually and collectively assessed charge to impairment allowances by industry segment

Individually assessed

Collectively assessed Total



CHF 000 2010 2009

Personal

Residential mortgages 6,203 – 6,203 4,590 – 4,590

Other personal 22,823 7,893 30,716 19,750 8,707 28,457

Commercial and corporate

Commercial industrial and international trade – – – 64 – 64

Commercial real estate and other property related 870 – 870 4,098 – 4,098

Total charge to income statement 29,896 7,893 37,789 28,502 8,707 37,209

Movement in allowance accounts for total loans and advances






At 1 January 73,351 22,813 96,164 52,884 15,662 68,546

Amounts written off (5,904) – (5,904) (7,416) – (7,416)

Recoveries of loans and advances written off in previous years (5,255) (219) (5,474) (3,627) (1,937) (5,564)

Charge to income statement 29,896 7,893 37,789 28,502 8,707 37,209

Transfer – – – 1,444 – 1,444

Exchange and other movements (11,295) (3,627) (14,922) 1,564 381 1,945

At 31 December 80,793 26,860 107,653 73,351 22,813 96,164

Impairment allowance as a percentage against loans and advances to customers

% 2010 2009

Total impairment allowances to gross lending1

Individually assessed impairment allowances 0.26 0.24

Collectively assessed impairment allowances 0.09 0.08

Total 0.35 0.32

1 Net of reverse repo transactions and settlement accounts.



Movement in impairment allowances by industry sector

CHF 000 2010 2009

Impairment allowance at 1 January 96,164 68,546

Amounts written off (5,904) (7,416)

Personal: (5,660) (5,853)

Residential mortgages – (317)

Other personal (5,825) (5,536)

Corporate and commercial: (79) (1,563)

Commercial, industrial and international trade – (983)

Commercial real estate and other property related (79) (580)

Recoveries of amounts written off in previous years (5,474) (5,564)

Personal: (5,183) (4,865)

Residential mortgages (2,074) (728)

Other personal (3,109) (4,137)

Corporate and commercial: (291) (699)

Commercial real estate and other property related (291) (699)

Charge to income statement 37,789 37,209

Personal: 36,919 33,047

Residential mortgages 6,203 4,590

Other personal 30,716 28,457

Corporate and commercial: 870 4,162

Commercial, industrial and international trade – 64

Commercial real estate and other property related 870 4,098

Exchange, transfer and other movements (14,922) 3,389

Impairment allowance at 31 December 107,653 96,164

Impaired allowances against customers:

Individually assessed 80,793 73,351

Collectively assessed 26,860 22,813

Impairment allowance at 31 December 107,653 96,164

%

Impairment allowances as a % of loans and advances:

Individually assessed 0.26 0.24

Collectively assessed 0.09 0.08

At 31 December 0.35 0.32

B. Liquidity managementThe objective of liquidity management is to ensure that all foreseeable commitments, those contractual and those determined on the basis of behavioural patterns which are required to be funded, can be met out of readily available and secure sources of funding.

Together with its capital resources, a surplus of stable customer deposits over loans to the group’s customers is placed with the treasury units where the group’s funding and liquidity are managed to ensure compliance with the different local regulatory requirements. In addition, all sites operate within the HSBC Group’s liquidity policy. This process includes:

projecting cash flows by major currency and consideration of the level of liquid assets necessary in relation thereto;

monitoring balance sheet liquidity and advances to core funding ratios against internal and regulatory requirements;

maintaining a diverse range of funding sources with adequate back-up facilities;

managing the concentration and profile of debt maturities;

managing contingent liquidity commitment exposures within predetermined caps;

maintaining debt financing plans;

monitoring of depositor concentration both in terms of the overall funding mix and to avoid undue reliance on large individual depositors; and

maintaining liquidity and funding contingency plans. These plans identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises, while minimising adverse long-term implications for the business.

Approximately two-thirds of the bank’s asset base is dollar-based, with the remainder mostly denominated in euros and pounds sterling. The non-dollar asset base is principally funded through currency-denominated customer deposits, supplemented by time deposits taken from the eurocurrency interbank market.

Swiss-regulated entities comply with the liquidity requirements of the Swiss Financial Market Authority. Minimum reserves applies only to Swiss currency and requires that liquid assets are, on the basis of a monthly average, at least equal to 2.5% of the amounts due to banks/clients maturing within 3 months, and 20% of the clients’ savings and deposit liabilities. Total liquidity embraces all currencies and requires that liquid and easily realisable assets are, on a continuous basis, at least equal to one-third of the short-term liabilities.

Other non-Swiss units maintain sufficient liquidity to meet their day-to-day needs and local regulatory requirements.

The breakdown by contractual maturity of assets and liabilities is shown on the table in Note 22.

Primary sources of fundingCurrent accounts and savings deposits payable on demand or at short notice form a significant part of the group’s funding, and the group places considerable importance on maintaining their stability.

For deposits, which are a primary source of funding, stability depends upon preserving depositor confidence in the group’s capital strength and liquidity, and competitive and transparent pricing.

The group also accesses professional markets in order to provide funding for non-banking subsidiaries that do not accept deposits, to maintain a presence in local money markets, and to optimise the funding of asset maturities not naturally matched by core deposit funding.

Of total liabilities of CHF 82.4 billion at 31 December 2010, funding from customers amounted to CHF 76.5 billion, of which CHF 75.9 billion was contractually repayable within one year.

An analysis of cash flows payable by the group under financial liabilities by remaining contractual maturities at the balance sheet date, is included in Note 22.

Assets available to meet these liabilities, and to cover outstanding commitments to lend (CHF 88.8 million) included cash, central bank balances, items in the course of collection, and treasury and other bills (CHF 7.2 billion); loans to banks (CHF 9.8 billion, including CHF 8.8 billion repayable within one year); and loans to customers (CHF 30.9 billion, including CHF 23.6 billion repayable within one year). In the normal course of business, a proportion of customer loans contractually repayable within one year will be extended. In addition, the Company held debt securities marketable at a value of CHF 38.1 billion. Of these assets, CHF 1.3 billion of debt securities and treasury and other bills had been pledged to secure liabilities.



Advances to core funding ratiosThe group emphasises the importance of core current deposits as a source of funds to finance lending to customers, and discourages reliance on short-term professional funding. This is achieved by placing limits on banking entities, which restrict their ability to increase loans and advances to customers without corresponding growth in core customer deposits or long-term debt funding. This measure is referred to as the “advance to core funding” ratio (previously referred to as the “advances to deposits” ratio). The ratio describes loans and advances to customers as a percentage of the total of core customer deposits and term funding with a remaining term to maturity in excess of one year. Loans and advances to customers which are part of reverse repurchase arrangements, and where the group receives securities which are deemed to be liquid, are excluded from the advances to core funding ratio. The distinction between core and non-core deposits means that the group’s measure of advances to core funding is more restrictive than that which can be inferred from the published financial statements.

and term debt markets and to generate funds from asset portfolios is restricted. The scenarios are modelled by all group banking entities. The appropriateness of the assumptions under each scenario is regularly reviewed.

Limits for cumulative net cash flows under stress scenarios are set.

Both ratio and cash flow limits reflect the local market place, the diversity of funding sources available, and the concentration risk from large depositors. Compliance with entity level limits is monitored and reported regularly to the Risk Management Meeting (RMM).

Contingent liquidity risk In the normal course of business, the group provides customers with committed facilities and standby facilities to customers. These facilities increase the funding requirements of the group when customers choose to raise drawdown levels over and above their normal utilisation rates. The liquidity risk consequences of increasing levels of drawdown are analysed in the form of projected cash flows under different stress scenarios.

C. Market risk management Market risk is the risk that interest rates, credit spreads, foreign exchange rates or equity and commodity prices will move and result in profits or losses to the group. Market risk arises on financial instruments which are valued at current market prices (mark-to-market basis) and those valued at cost plus accrued interest (accruals basis). The main valuation sources are securities prices, foreign exchange rates, and interest rate yield curves and volatilities.

1. Trading and non-trading risks Trading risks Trading risks arise either from customer-related business or from position-taking. Trading positions are valued on a market-to-market basis.

The group manages market risk through risk limits approved by the Asset and Liability Management Committee (ALCO).

Risk limits are determined for each location and, within location, for each portfolio. Limits are set by product and risk type, with market liquidity being a principal factor in determining the level of limits set.

Only those offices which management deems to have sufficient derivative product expertise and appropriate control systems are authorised to trade derivative products. Limits are set using a combination of risk measurement techniques, including position limits, sensitivity limits, as well as value- at-risk limits at a portfolio level. Similarly, option risks are controlled through full revaluation limits in conjunction with limits on the underlying variables that determine each option’s value.

Non-trading risks The principal objective of market risk management of non-trading portfolios is to optimise net interest income.

Market risk in non-trading portfolios arises principally from mismatches between the future yield on assets and their funding cost as a result of interest rate changes. Analysis of this risk is complicated by having to make assumptions on optionality in certain product areas, for example mortgage prepayments, and from behavioural assumptions regarding the economic duration of liabilities which are contractually repayable on demand, for example current accounts. This prospective change in future net interest income from non-trading portfolios will be reflected in the current realisable value of these positions, should they be sold or closed prior to maturity. In order to manage this risk optimally, market risk in non-trading portfolios is transferred to Global Markets or to separate books managed under the auspices of the local ALCO.

A positive interest rate sensitivity gap exists where more assets than liabilities re-price during a given period. Although a positive gap position tends to benefit net interest income in a rising interest rate environment, the actual effect will depend on a number of factors, including the extent to which repayments are made earlier or later than the contracted date; and, variations in interest rates within re-pricing periods and among currencies. Similarly, a negative interest rate sensitivity gap exists where more liabilities than assets re-price during a given period. In this case, a negative gap position tends to benefit net interest income in a declining interest rate environment, but again the actual effect will depend on the same factors as for positive interest rate gaps, as described above.

The group would meet any unexpected net cash outflows by selling securities and accessing additional funding sources such as interbank or collateralised lending markets. In addition to the advances to core funding ratios, the group uses a range of other measures for managing liquidity risk. These other measures include the ratio of net liquid assets to customer liabilities and projected cash flow scenario analyses.

Projected cash flow scenario analyses The Company uses a number of standard projected cash flow scenarios designed to model both group-specific and market-wide liquidity crises, in which the rate and timing of deposit withdrawals and drawdowns on committed lending facilities are varied, and the ability to access interbank funding

% 2010 2009

Advances to core funding ratios

Year end 59.90 35.00

Maximum 59.90 35.00

Minimum 50.30 31.00

Average 52.72 32.46

Sensitivity analysis The group uses a range of tools to monitor and limit market risk exposures. These include value at risk (VAR), present value of a basis point, and stress testing.

1. Value at riskVAR is one of the principal tools used by HSBC to monitor and limit market risk exposure in its trading portfolios. VAR is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon (for HSBC, one day) and to a given level of confidence (for HSBC, 99%). HSBC calculates VAR daily. The VAR model used by HSBC is predominantly based on historical simulation. The historical simulation model derives plausible future scenarios from historical market rates time series, taking account of interrelationships between different markets and rates, for example between interest rates and foreign exchange rates.

Potential movements in market prices are calculated with reference to market data from the last two years. Although a valuable guide to risk, VAR should always be viewed in the context of its limitations. For example:

the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;

the use of a one-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect the market risk arising from times of severe illiquidity, when a one-day holding period may be insufficient to liquidate or hedge all positions fully;

the use of a 99% confidence level, by definition, does not take into account any losses that might occur beyond this level of confidence; and

VAR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intraday exposures.

Value at risk of the trading and non-trading portfolios was as follows:

Positions taken with trading intent – VAR by risk type

Trading VAR for 2009

At 31 December

Minimum during

the year

Maximum during

the yearAverage for

the year

CHF 000 2010

Total 868 796 3,922 1,522

Foreign exchange 33 30 150 58

Interest rate 867 68 3,917 548

Credit spread 814 796 1,333 952

At 31 December

Minimum during

the year

Maximum during

the yearAverage for

the year

CHF 000 2009

Total 607 483 3,571 1,942

Foreign exchange 267 212 1,571 855

Interest rate 340 271 2,000 1,087



Positions taken without trading intent – VAR by risk type

Non-trading VAR for 2009

At 31 December

Minimum during

the year

Maximum during

the yearAverage for

the year

CHF 000 2010

Total 13,968 11,526 30,593 16,276


Interest rate 4,881 3,057 10,689 5,687

Credit spread 12,718 11,526 13,993 12,718

At 31 December

Minimum during

the year

Maximum during

the yearAverage for

the year

CHF 000 2009

Total 10,214 8,924 15,301 12,034


Interest rate 10,009 8,745 14,995 11,794

2. Present value of a basis pointSensitivity measures are used to monitor the market risk positions within each risk type, for example, present value of a basis point movement in interest rates. Sensitivity limits are set for portfolios, products and risk types, with the depth of the market being one of the principal factors in determining the level of limits set.

3. Stress testingIn recognition of the limitations of VAR, HSBC augments VAR with stress testing to evaluate the potential impact on portfolio values of more extreme, although plausible, events or movements in a set of financial variables.

The process is governed by the “Stress Testing Review Group” forum. This coordinates the group’s stress testing scenarios in conjunction with the regional risk managers. Actual market risk exposures and market events are considered in determining the stress scenarios to be applied at portfolio and consolidated level. These scenarios are as follows:

sensitivity scenarios, which consider the impact of market moves to any single risk factor or a set of factors. For example, the impact resulting from a break of a currency peg that is unlikely to be captured within the VAR models;

technical scenarios, which consider the largest move in each risk factor without consideration of any underlying market correlation;

hypothetical scenarios, which consider potential macroeconomic events; and

historical scenarios, which incorporate historical observations of market moves during previous periods of stress which would not be captured within VAR.

Stress testing results are reported to senior management and provide it with an assessment of the financial impact such events would have on the group’s profit. The daily losses experienced during 2010 and 2009 were within the stress loss scenarios reported to senior management.

2. structural foreign exchange exposuresStructural foreign exchange exposures represent net investments in subsidiaries, branches or associated undertakings, the functional currencies of which are currencies other than the US dollar.

Revaluation gains and losses on structural exposures are recorded in the consolidated statement of recognised income and expense. The main operating (or functional) currencies of the group’s subsidiaries are pounds sterling, euros, US dollars, Swiss francs, Hong Kong dollars and Singapore dollars.

Trading value at riskThe foreign exchange exposures comprise those which arise from foreign exchange dealing to meet the financial needs of customers. These exposures are transferred to local treasury units where they are managed together with exposures which result from dealing within approved limits. VAR on foreign exchange trading positions is shown in the tables on page 75.

3. Interest rate exposureThe group’s interest rate exposures comprise those originating in its treasury trading activities to meet the financial needs of customers, and structural interest rate exposures. Both are managed under limits described above. Interest rate risk arises on trading positions and accrual books. The interest rate risk on interest rate trading positions is set out in the trading VAR tables on page 75.

Structural interest rate risk Structural interest rate risk arises from the differing repricing characteristics of banking assets and liabilities, including non-interest-bearing liabilities such as shareholders’ funds and some current accounts.

D. Operational risk managementOperational risk is the risk of loss arising through fraud, unauthorised activities, error, omission, inefficiency, systems failure or from external events. It is inherent to every business organisation and covers a wide spectrum of issues.

The HSBC Group manages this risk through a controls-based environment in which processes are documented, authorisation is independent, and transactions are reconciled and monitored. This risk management is supported by an independent programme of periodic reviews undertaken by internal audit, and by monitoring external operational risk events, which ensures that the HSBC Group stays in line with best practice and takes account of lessons learned from publicised operational failures within the financial services industry.

The HSBC Group has codified its operational risk management process by issuing a high-level standard. This explains how the HSBC Group manages operational risk by identifying, assessing, monitoring, controlling and mitigating the risk, rectifying operational risk events, and implementing any additional procedures required for compliance with local regulatory requirements. The processes undertaken to manage operational risk are determined by reference to the scale and nature of each HSBC Group operation. The HSBC Group standard covers the following:

operational risk management responsibility is assigned at a senior management level within the business operation;

information systems are used to record the identification and assessment of operational risks and to generate appropriate, regular management reporting;

operational risks are identified by risk assessments covering operational risks facing each business and risks inherent in processes, activities and products. Risk assessment incorporates a regular review of risks identified to monitor significant changes;

operational risk loss data is collected and reported to senior management. This reporting covers aggregate operational risk losses and details of incidents above a materiality threshold; and

risk mitigation, including insurance, is considered where this is cost-effective.

Local management within the group is responsible for implementation of the HSBC Group standard on operational risk throughout its operation. Where deficiencies are evident, these are required to be rectified within a reasonable timeframe.

E. Reputational risk management The safeguarding of HSBC’s reputation is of paramount importance to its continued prosperity and is the responsibility of every member of staff. Reputational risks can arise from social, ethical or environmental issues, or as a consequence of operational risk events. As a banking group, HSBC’s good reputation depends upon the way in which it conducts its business, but it can also be affected by the way in which clients, to whom it provides financial services, conduct themselves.

Standards on all major aspects of business are set for HSBC and for individual subsidiaries, businesses and functions. These policies, which are an integral part of the internal control systems, are communicated through manuals and statements of policy and are promulgated through internal communications and training. The policies set out operational procedures in all areas of reputational risk, including money laundering deterrence, environmental impact, anti-corruption measures and employee relations.

Management in all operating entities is required to establish a strong internal control structure to minimise the risk of operational and financial failure, and to ensure that a full appraisal of reputational implications is made before strategic decisions are taken. The group internal audit function monitors compliance with policies and standards.



28. Capital management

Capital measurement and allocation The group’s approach to capital management is driven by its strategic and organisational requirements, taking into account the regulatory, economic and commercial environment in which it operates.

It is the group objective to maintain a strong capital base to support the development of the business and to meet capital requirements at all times.

The group’s policy is underpinned by a capital management framework enabling it to manage its capital in a consistent and aligned manner. The framework incorporates a number of different capital measures including invested capital, economic capital and regulatory capital defined as follows:

invested capital is the equity capital provided to the group by HSBC;

economic capital is the metrics by which risk is linked to capital;

regulatory capital is the minimum level of capital which the group is required to hold in accordance with the rules set by the Swiss Financial Market Supervisory Authority (FINMA) for the bank and the consolidated group and by the local regulators for individual subsidiary companies.

Through structured governance processes, discipline is maintained over investment and capital allocation decisions, seeking to ensure that returns on investment are adequate after taking account of the capital costs. The strategy is to allocate capital on the basis of economic profit generation, regulatory and economic capital requirements.

Through the capital management framework the group manages the following identified material risks: credit, market, operational, interest rate risk in the banking book and pension fund risk. Stress testing is incorporated into the capital management framework and is an important component of understanding the sensitivities of the core assumptions in the group’s capital plans to the adverse effect of extreme, but plausible, events. Stress testing allows senior management

to formulate its response, including risk mitigating actions, before the conditions start to reflect the stress scenarios identified. The actual market stresses experienced by the financial system in recent years have been used to inform the capital planning process and further develop the stress scenarios employed by the group. Other stress tests are also carried out, both at the request of regulators and by the regulators themselves using their prescribed assumptions. The group takes into account the results of all such regulatory stress testing when undertaking its internal capital management assessment. The group’s capital management process is articulated in an annual capital plan which is approved by the Board.

FINMA is the supervisor of the group and, in this capacity, receives information on its capital adequacy and sets minimum capital requirements. Individual banking subsidiaries are directly regulated by the appropriate local banking supervisors, which set and monitor their capital adequacy requirements. FINMA requires each bank and banking group to maintain an individually prescribed ratio of total capital to risk-weighted assets.

The group calculates capital using the Basel II framework of the Basel Committee on Banking Supervision. Basel II is structured around three “pillars”: Pillar 1: minimum capital requirements; Pillar 2: Supervisory Review and Evaluation Process; and Pillar 3: market discipline. The group’s capital resources policy is to maintain an efficient allocation of capital and at all times a prudent relationship between its total capital, as measured according to the criteria used under Basel II and the risks of its business.

Pillar 1 capital requirementsPillar 1 covers the capital resources requirements for credit risk (including counterparty credit risk), market risk and operational risk.

Basel II applies three approaches of increasing sophistication to the calculation of credit risk regulatory capital. The most basic, the standardised approach, requires banks to use external credit ratings to

determine the risk weightings applied to rated counterparties, and groups other counterparties into broad categories and applies standardised risk weightings to these categories. In the next level, the internal ratings-based foundation approach allows banks to calculate their credit risk regulatory capital requirement on the basis of their internal assessment of the probability that a counterparty will default, but with quantification of exposure and loss estimates being subject to standard supervisory parameters. Finally, the internal ratings-based advanced approach (“IRB advanced approach”), will allow banks to use their own internal assessment of not only the probability of default but also the quantification of exposure at default and loss given default. Expected losses are calculated by multiplying the probability of default by the loss given default multiplied by the exposure at default. Expected losses are deducted from capital to the extent that they exceed accounting impairment allowances. The capital requirement under the internal ratings-based approaches is intended to cover unexpected losses and is derived from a formula specified in the regulatory rules, which incorporates these factors and other variables such as maturity and correlation.

For credit risk, the group has adopted the IRB advanced approach to Basel II for the majority of its business. The IRB permission at the group level has been granted by FINMA in 2009.

Counterparty credit risk, which is included in the credit risk under the FINMA rules, arises for over-the-counter derivatives and securities financing transactions. It is calculated in both the trading and non-trading books and is the risk that the counterparty to a transaction may default before completing the satisfactory settlement of the transaction. Three approaches to determining counterparty credit risk exposure values are defined by Basel II: standardised, mark-to-market and internal model method. These exposure values are used to determine capital requirements under one of the credit risk approaches: standardised, IRB

foundation or IRB advanced. The group uses the mark-to-market approach for counterparty credit risk.

Basel II also introduces capital requirements for operational risk and, again, contains three levels of sophistication. The capital required under the basic indicator approach will be a percentage of gross revenues, whereas under the standardised approach it will be one of three different percentages of gross revenues allocated to each of eight defined business lines. Finally, the advanced measurement approach uses the bank’s own statistical analysis and modelling of operational risk data to determine capital requirements. For operational risk, the group has adopted the basis indicator approach.

Market risk is the risk that movements in market risk factors, including foreign exchange, commodity prices, interest rates, credit spread and equity prices will reduce group’s income or the value of its portfolios. The market risk capital requirement is measured by the standard rules.

For individual banking subsidiaries, the timing and manner of implementing Basel II varies by jurisdiction according to requirements set by local banking supervisors. Applying Basel II across the group’s geographically diverse businesses, which operate in a number of different regulatory environments, presents a significant logistical and technological challenge, and an extensive programme of implementation projects is currently in progress. Basel II allows local regulators to exercise discretion in a number of areas. The extent to which their requirements diverge, coupled with how FINMA and the local regulators in the other countries in which the group operates interact, are key factors in completing implementation of Basel II.

Pillar 2 capital requirementThe second pillar of Basel II (Supervisory Review and Evaluation Process) involves both firms and regulators taking a view on whether a firm should hold additional capital against risks not covered in pillar 1. Part of the pillar 2 process is the Internal Capital Adequacy Assessment Process (ICAAP) which is the group’s self assessment of risks not captured by pillar 1.

Pillar 3 disclosure requirementsPillar 3 of Basel II is related to market discipline and aims to make firms more transparent by requiring them to publish more details of their risks, capital and risk management. The group has been exempted of the Pillar 3 disclosures by the Swiss regulator, being a subsidiary of a firm which is subject to similar disclosure rules.

Future developmentsThe regulation and supervision of financial institutions continues to undergo significant change in response to the global financial crisis. In December 2010, the Basel Committee issued final rules in two documents “A global regulatory framework for more resilient banks and banking systems”, and “International framework for liquidity risk measurement, standards and monitoring”, which together are commonly referred to as “Basel III”. The new minimum capital requirements will be phased in from 1 January 2013, with full implementation required by 1 January 2019. The capital conservation buffer and the countercyclical capital buffer will be phased-in in parallel from 1 January 2016, becoming fully effective on 1 January 2019. The leverage ratio will be subject to a supervisory monitoring period which commenced 1 January 2011, and a parallel run period which will run from 1 January 2013 until 1 January 2017. Further calibration of the leverage ratio will be carried out in the first half of 2017, with a view to migrate to a Pillar 1 requirement from 1 January 2018. The Basel Committee has increased the capital requirements for the trading book and complex securitisation exposures, which must be implemented by 31 December 2011. They will continue to conduct the fundamental review of the trading book, which is targeted for completion by the end of 2011. In addition to the reforms discussed above, identified Global Systemically Important Financial Institutions (GSIFIs) may be subjected to a further capital requirement, which has not yet been announced.

On 13 January 2011, the Basel Committee issued “Further minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss”. Instruments issued on or after 1 January 2013 may only be included in regulatory capital if the new requirements are met. The regulatory capital recognition of securities issued prior to 1 January 2013 will decline from 1 January 2013 in line with Basel III grandfathering rules.



29. Contingent liabilities, contractual commitments and guarantees

A. Contingent liabilities, contractual commitments and guarantees

CHF 000 2010 2009

Contract amounts

Guarantees

Guarantees and irrevocable letters of credit pledged as collateral security: 2,659,008 3,153,308

1 year and under 2,318,260 2,758,519

Over 1 year 340,748 394,789

Total 2,659,008 3,153,308

Commitments

Documentary credits and short-term trade-related transactions 99,927 139,214

Undrawn formal standby facilities, credit lines and other commitments to lend 3,860,477 2,354,542

Total 3,960,404 2,493,756

The table above discloses the nominal amounts of commitments, guarantees and other contingent liabilities.

Contingent liabilities and commitments are credit-related instruments, which include letters of credit, guarantees and commitments to extend credit. The contractual amounts represent the amounts at risk, should the contract be fully drawn upon and the client defaults. Since a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the contractual amounts is not representative of future liquidity requirements.

B. Guarantees The group provides guarantees and similar undertakings on behalf of both third party customers and other entities within the group. These guarantees are generally provided in the normal course of the group’s banking business.

The principal types of guarantees provided, and the maximum potential amount of future payments which the group could be required to make at 31 December 2010 and 31 December 2009, were as follows:

Guarantees in favour of

third parties

Guarantees by hsBC Private

Banking holdings (suisse) sA in

favour of other group entities

Guarantees in favour of

third parties

Guarantees by hsBC Private

Banking holdings (suisse) sA in

favour of other group entities


Guarantee type

Financial guarantees1 2,581,648 77,360 3,138,934 14,374

Balance as at 31 December 2,581,648 77,360 3,138,934 14,374

The above maximum amounts payable reflect the group’s maximum exposure under a large number of individual guarantee undertakings. The risks and exposures arising from guarantees are captured and managed in accordance with the group’s overall credit risk management policies and procedures.

Approximately one-half of the above guarantees have a term of less than one year. Guarantees with a term of more than one year are subject to the group’s annual credit review process.

When the group has given a guarantee on behalf of a customer, it will have the right to recover from that customer any amounts paid under the guarantee. At 31 December 2010, the group held collateral amounting to CHF 9.2 billion (2009: CHF 9.6 billion), which could be used to recover amounts paid under the above guarantees.

A provision is recognised only where the group considers that it is more likely than not that an obligation exists under the guarantees. At 31 December 2010, the group had established no provisions in respect of its obligations under outstanding guarantees.

1 Financial guarantees include undertakings to stand behind the obligations of customers or other group entities and to undertake these obligations if the other entity fails to do so. Intra-group items of this type will also include guarantees of a capital nature given to another group entity and intended to be considered as capital support by the relevant regulatory authority.

The regulatory capital position at 31 December was as follows:

CHF 000 2010 2009

Composition of capital

Called up share capital 1,363,330 1,363,330

Share premium 1,153,079 1,153,079

Other reserves (351,878) (562,481)

Retained earnings 4,171,692 4,879,727

Non-controlling interests 22,006 13,910

Total equity as per balance sheet 6,358,229 6,847,565

Buildings revaluation (27,641) (31,082)

Unrealised gains booked into the "Debt securities available-for-sale reserve" (177,793) (292,098)

Unrealised gains booked into the "Equity securities available-for-sale reserve" (26,083) (69,181)

Net losses from "Cash flow hedging reserve" valuation (15,564) (11,564)

Regulatory adjustments to the accounting basis (247,081) (403,925)

Goodwill (285,715) (313,784)

Dividend to be paid (704,793) (926,100)

Deductions (990,508) (1,239,884)

Total qualifying tier 1 capital 5,120,640 5,203,756

Other deductions from total capital (1,158) (1,159)

Total regulatory capital - Basel I 5,119,482 5,202,597

Expected loss not covered by provisions (66,166) (138,284)

Additional capital to meet 80% of Basel 1 (81,574) –

Total regulatory capital - Basel II 4,971,742 5,064,313

Risk-weighted assets - Basel I

Banking book 36,917,849 39,965,664

Trading book 477,256 516,385

Total risk-weighted assets - Basel I 37,395,105 40,482,049

Risk-weighted assets - Basel II

Credit risk 23,190,968 28,704,977

Market risk 477,256 516,385

Operational risk 4,401,122 4,964,719

Total risk-weighted assets - Basel II 28,069,346 34,186,081

Capital ratios - Basel I (%)

Total capital 13.69 12.85

Tier 1 capital 13.69 12.85

Capital ratios - Basel II (%)

Total capital 17.71 14.81



30. Lease commitments

A. Finance lease commitments

B. Operating lease commitments At 31 December 2010, the group was obligated under a number of non-cancellable operating leases for properties and equipment, for which the future minimum lease payments extend over a number of years.

During the year, CHF 53.4 million (2009: CHF 44.3 million) was recognised within “General and administrative expenses” in respect of lease and sublease agreements, all of which related to minimum lease payments.

31. Litigation

Bernard L. Madoff Investment securities LLCIn December 2008, Bernard L. Madoff (“Madoff”) was arrested for running a Ponzi scheme and a trustee was appointed for the liquidation of his firm, Bernard L. Madoff Investment Securities LLC (“Madoff Securities”). Since his appointment, the trustee has been recovering assets and processing claims of Madoff Securities customers.

Plaintiffs (including funds, fund investors, and the Madoff Securities trustee) have commenced Madoff-related proceedings against various HSBC companies, including the group and numerous other defendants, in a multitude of jurisdictions. The suits allege that the HSBC defendants knew or should have known of Madoff’s fraud and breached various duties to the funds and fund investors.

Between October 2009 and July 2010, Fairfield Sentry Limited and Fairfield Sigma Limited (“Fairfield”), funds whose assets were directly or indirectly invested with Madoff Securities, commenced multiple suits in the British Virgin Islands and the US against numerous fund shareholders, including the group and various HSBC companies that acted as nominees for clients of HSBC’s private banking business and other clients who invested in the Fairfield funds. The Fairfield actions seek restitution of amounts paid to the defendants in connection with share redemptions, on the ground that such payments were made by mistake, based on inflated values resulting from Madoff’s fraud.

In December 2010, the Madoff Securities trustee commenced proceedings against various HSBC companies, including the group, in the US bankruptcy court. The action (which also names certain funds, investment managers, and other entities and individuals) seeks USD 9 billion in damages and additional recoveries from HSBC and the various co-defendants. It seeks damages against HSBC for allegedly aiding and abetting Madoff’s fraud and breach of fiduciary duty, recovery of unspecified amounts received by HSBC from funds invested with Madoff, and recovery of fees.

There are many factors which may affect the range of possible outcomes and the resulting financial impact, of the various Madoff-related proceedings, including but not limited to the circumstances of the fraud, the multiple jurisdictions in which the proceedings have been

Total future minimum payments

Interest charges Present value

Total future minimum payments

Interest charges Present value

CHF 000 2010 2009

No later than one year 1,945 (1,325) 620 2,150 (1,541) 609

Later than one year and no later than five years 7,777 (4,948) 2,829 8,600 (5,805) 2,795

Later than five years 28,697 (12,469) 16,228 34,916 (15,951) 18,965

Total 38,419 (18,742) 19,677 45,666 (23,297) 22,369

Land and buildings Equipment

Land and buildings Equipment

CHF 000 2010 2009

Future minimum lease payments under non-cancellable operating leases expiring

No later than one year 46,295 47 29,798 45

Later than one year and no later than five years 147,221 260 105,768 136

Later than five years 224,341 – 131,186 –

Total 417,857 307 266,752 181

brought and the number of different plaintiffs and defendants in such proceedings. The cases where the group is named as a defendant are at an early stage. For these reasons, among others, it is not practicable at this time for the group to estimate reliably the aggregate liabilities, or ranges of liabilities, that might arise as a result of all such claims. In any event, the group considers that it has good defences to these claims and will continue to defend itself vigorously.

Other litigationThis action apart, the group is party to legal actions in a number of jurisdictions arising out of its normal business operations. The group considers that none of the actions is material, and none is expected to result in a significant adverse effect on the financial position of the group, either individually or in the aggregate. Management believes that adequate provisions have been made in respect of the litigation arising out of its normal business operations.

32. Related party transactions

A. Transactions with Directors and other Key Management PersonnelKey Management Personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of HSBC Private Banking Holdings (Suisse) SA and the group and also includes members of the Board of Directors.

Compensation of Key Management Personnel The following represents the compensation paid to the Key Management Personnel of the bank in exchange for services rendered to the bank.

Loans to the Board of Directors and Key Management Personnel Loans to the Board of Directors and Key Management Personnel were CHF 17.7 million (2009: CHF 159.6 million).

B. Summary of significant aggregate balances of transactions with other related parties of HSBC Private Banking Holdings (Suisse) SA

Fellow subsidiary undertakings



Balance at 31 December

CHF 000 2010 2009

Assets

Trading assets 410,663 433,989

Derivatives 388,222 373,409

Loans and advances to banks 6,157,903 11,971,087

Loans and advances to customers 38,061 101,546

Financial investments 14,012,805 16,392,621

Total related party assets 21,007,654 29,272,652

Liabilities

Deposits by banks 3,082,341 1,732,876

Customer accounts 632,322 699,014

Derivatives 580,301 749,480

Total related party liabilities 4,294,964 3,181,370

Off-balance sheet

Derivatives 48,133,601 60,433,927

Contingent liabilities 77,360 14,374

CHF in millions 2010 2009

Short-term employee benefits 49.0 46.7

Post-employment benefits – –

Termination benefits – –

Share-based payments 16.3 17.6

65.3 64.3

Pension funds At 31 December 2010, CHF 546.6 million (2009: CHF 624.4 million) of the group’s pension fund assets were under management of the HSBC Group companies. Fees of CHF 1.0 million (2009: CHF 0.3 million) were earned by the group companies for these management services. The group’s pension funds had placed deposits of CHF 45.7 million (2009: CHF 36.9 million) with its banking subsidiaries.

33. Foreign currency amounts

The Swiss franc figures shown in the consolidated financial statements are translated from US dollars at the average rate of exchange for the years ended 31 December 2010 and 2009, and at the closing rate on those dates. Respectively these were as follows:

34. Events after the balance sheet date

There have been no material events after the balance sheet date which would require disclosure or adjustment to the 31 December 2010 financial statements.

On 22 March 2011, the Board of Directors authorised the financial statements for issue.

CHF 000 2010 2009

Deposits by bank 469,990 516,355

Interest expense 1,743 835

General and administrative expenses 10,739 7,846

Average rate Closing rate Average rate Closing rate

2010 2009

Swiss francs per 1 USD 1.0367 0.9335 1.0821 1.029

CHF in billions 2010 2009

Discretionary assets 25.7 25.7

Other invested assets 210.7 223.0

Total invested assets 236.4 248.7

Thereof double count 0.7 0.5

Net new money 7.6 (11.0)

35. swiss banking law requirements

The consolidated financial statements of the group are prepared in accordance with the IFRS. Set out below are the significant differences regarding recognition and measurement between IFRS, the Banking Ordinance provisions and the FINMA Guidelines governing financial statement reporting pursuant to Article 23 through Article 27 of the Banking Ordinance.

A. ConsolidationUnder IFRS, entities which are directly or indirectly controlled by the group are consolidated. Under Swiss law, only entities that are active in the field of banking and finance as well as real estate entities are subject to consolidation.

B. Financial investmentsUnder IFRS, available-for-sale financial investments are carried at fair value. Changes in fair value are recorded directly in other comprehensive income until an investment is sold, collected or otherwise disposed of, or until an investment is determined to be impaired. At the time an available-for-sale investment is determined to be impaired, the cumulative unrealised loss previously recognised in other comprehensive income is included in net profit and loss for the period. On disposal of a financial investment, the difference between the net disposal proceeds and the carrying amount, plus any attributable unrealised gain or loss balance recognised in other comprehensive income, is included in net profit and loss for the period.

Under Swiss law, financial investments are carried at the lower of cost or market value. Reductions to market value below cost and reversals of such reductions, as well as gains and losses on disposal, are included in “Other income”.

C. Cash flow hedgesThe group uses derivative instruments to hedge against the exposure from varying cash flows receivable and payable.

Under IFRS, when hedge accounting is applied for these instruments, the unrealised gain or loss on the effective portion of the derivatives is recorded in other comprehensive income until the hedged cash flows occur, at which time the accumulated gain or loss is realised and released to income.

Under Swiss law, the unrealised gains or losses on the effective portion of the derivative instruments used to hedge cash flow exposures are deferred on the balance sheet as assets or liabilities. The deferred amounts are released to income when the hedged cash flows occur.

D. GoodwillUnder IFRS, goodwill is tested for impairment annually by comparing the present value of the expected future cash flows from a business with the carrying value of its net assets, including attributable goodwill. Goodwill is stated at cost less accumulated impairment losses which are charged to the income statement. Under Swiss law, goodwill must be amortised over a period not exceeding five years, unless a longer useful life, which may not exceed twenty years, can be justified.

36. Invested assets and net new money

Invested assets include all client assets managed by or deposited with the group for investment purposes only. They therefore exclude all assets held for purely transactional purposes. Assets included are, for example, managed fund assets, discretionary and advisory wealth management portfolios, fiduciary deposits, time deposits, savings accounts and wealth management securities. Custody-only assets and transactional cash or current accounts, as well as non-bankable assets (e.g. art collections) and deposits from third-party banks for funding or trading purposes, are excluded.

Discretionary assets are defined as those where the group decides on how a client’s assets are invested. Other invested assets are those where the client decides on how the assets are invested.

Net new money is the net amount of invested assets that are acquired by the group from new clients, invested assets that are lost when clients terminate their relationship with the group, and the inflows and outflows of invested assets from existing group clients. Interest and dividend income from invested assets is not included in the net new money result. Interest expense on loans results in net new money outflows.



The above transactions were made in the ordinary course of business and on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar standing or, where applicable, with other employees. The transactions did not involve more than the normal risk of repayment or present other unfavourable features.

Associates Information relating to associates can be found in Note 14.

hsBC holdings plc

Balance at 31 December

CHF 000 2010 2009

Income statement

Interest income 321,650 560,827

Interest expense 6,694 8,792

Fee income 28,672 36,614

Fee expense 55,633 41,139

Other operating income 187 (2,318)

General and administrative expenses 91,352 99,020

Report of the statutory auditor

As statutory auditors, we have audited the accompanying consolidated financial statements of HSBC Private Banking Holdings (Suisse) SA which comprise the income statement, statement of comprehensive income, balance sheet, cash flow statement, statement of changes in equity and notes (pages 16 to 85) for the year ended 31 December 2010.

Board of Directors’ responsibilityThe Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards and International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements for the year ended 31 December 2010 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with International Financial Reporting Standards and comply with Swiss law.

International Financial Reporting Standards vary in certain significant respects from generally accepted accounting principles in Switzerland. The most significant differences with generally accepted accounting principles in Switzerland are described in Note 35.

Report on other legal requirementsWe confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.

In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.

We recommend that the consolidated financial statements submitted to you be approved.

KPMG SA Olivier GauderonLicensed Audit Expert Auditor in Charge

Raphaël PrébandierLicensed Audit Expert

Geneva, 25 May 2011

Report of the statutory auditor on the consolidated financial statements to the General Meeting of hsBC Private Banking holdings (suisse) sA


UsD m GBP m hKD m UsD m

2010 2009

For the year

Profit before tax 19,037 12,336 147,898 7,079

Profit attributable to shareholders of the parent company 13,159 8,527 102,232 5,834

Dividends 5,937 3,847 46,125 5,370

At the year-end

Total shareholders’ equity 147,667 95,098 1,147,816 128,299

Capital resources 167,555 107,905 1,302,405 155,729

Customer accounts and deposits by banks 1,338,309 861,871 10,402,675 1,283,906

Total assets 2,454,689 1,580,820 19,080,298 2,364,452

Risk-weighted assets 1,103,113 710,405 8,574,497 1,133,168

UsD GBP hKD UsD

2010 2009

Per ordinary share

Basic earnings1 0.73 0.47 5.67 0.34

Diluted earnings1 0.72 0.47 5.59 0.34

Dividends2 0.34 0.22 2.64 0.34

Net asset value at the year-end 7.94 5.11 61.71 7.17

share information

USD 0.50 ordinary shares in issue 17,686 m

Market capitalisation 180 bn

Closing market price per share GBP 6.51

Financial highlights of hsBC holdings plc

1 The effect of the bonus element of the rights issue has been included within the basic and diluted earnings per share.

2 Under IFRSs accounting rules, the dividend per share of USD 0.34 shown in the accounts is the total of the dividends declared during 2010. This represents the fourth interim dividend for 2009 and the first, second and third interim dividends for 2010. As the fourth interim dividend for 2010 was declared in 2011, it will be reflected in the accounts for 2011.

3 Total shareholder return (“TSR”) is as defined in the Annual Report and Accounts 2010.

Over 1 year Over 3 years Over 5 years

Total shareholder return to 31 December 20103 95.3 103.4 103.4

Benchmarks:

FTSE 100 112.6 102.8 126.3

MSCI World 115.9 111.0 127.0

MSCI Banks 103.7 81.9 79.0


Financial highlights of HSBC Holdings plc

% 2010 2009

Performance ratios

Return on average invested capital 1 8.7 4.1

Return on average total shareholders’ equity 9.5 5.1

Post-tax return on average total assets 0.6 0.3

Post-tax return on average risk-weighted assets 1.3 0.6

Efficiency and revenue mix ratios

Cost efficiency ratio 55 52

As a percentage of total operating income:

Net interest income 49.3 51.8

Net fee income 21.7 22.5

Net trading income 9.0 12.5

Capital ratios

Core tier 1 ratio 10.5 9.4

Tier 1 ratio 12.1 10.8

Total capital ratio 15.2 13.7

1 Return on invested capital is based on the profit attributable to ordinary shareholders. Average invested capital is measured as average total shareholders’ equity after adding back goodwill previously written-off directly to reserves, deducting average equity preference shares issued by HSBC Holdings plc and deducting/(adding) average reserves for unrealised gains/(losses) on effective cash flow hedges and available-for-sale securities. This measure reflects capital initially invested and subsequent profit.

hsBC Private Bank office locations worldwide90


www.hsbcprivatebank.com

The hsBC Group parent company hsBC Private Bank principal holding company

HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from around 7,500 offices in 87 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of USD 2,455 billion at 31 December 2010, HSBC is one of the world’s largest banking and financial services organisations. HSBC is marketed worldwide as “the world’s local bank”.

Americas

Belo Horizonte Bermuda Beverly Hills Brasilia Campinas Chicago Curitiba Florianopolis Guadalajara Mexico City Miami Monterrey Montevideo New York Panama City Porto Alegre Puebla Punta del Este Recife Ribeirao Preto Rio de Janeiro Salvador San Francisco Santiago Sao Paulo Wilmington

United Kingdom

Ascot Birmingham Bristol Cardiff Edinburgh Guernsey Hungerford Jersey Leeds London Manchester Oxford

Europe

Ankara Athens Baden-Baden Berlin Bordeaux Cologne Dublin Dusseldorf Frankfurt Geneva Gstaad Hamburg Istanbul Izmir Lugano Luxembourg Lyon Marseille Monaco Munich Nice Paris St. Moritz Stockholm Stuttgart Zurich

Africa

Johannesburg

Russia

Moscow

Middle East

Abu Dhabi Beirut Doha Dubai Kuwait Manama Muscat

India

Bangalore Chennai Hyderabad Kolkata Mumbai New Delhi Pune

Asia

Auckland Beijing Cook IslandsGuangzhou Hong Kong SAR Kuala Lumpur Manila Nagoya Osaka Shanghai Singapore Taipei Tokyo

11EMCH120_Annual Report PBSU_ENG

This annual report is available online at www.hsbcprivatebank.com

© Copyright HSBC Private Banking Holdings (Suisse) SA 2011. All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the prior written permission of HSBC Private Banking Holdings (Suisse) SA.

Printed by Atar Roto Presse SA, Vernier, Switzerland, on Heaven 42 paper using vegetable oil-based inks. Made in Germany, the paper comprises 100% virgin fibre. Pulps used are elemental chlorine-free.

The FSC® logo identifies products which contain wood from well-managed forests certified in accordance with the rules of the Forest Stewardship Council®.

www.hsbcprivatebank.com

180811 Annual Report 2010 Hsbc Pbsu Holdings

Documents

Transcript of 180811 Annual Report 2010 Hsbc Pbsu Holdings