HSBC 2004 Annual Report Download - page 353

351
2004 2003
Carrying
value
Fair
value
Carrying
value
Fair
value
US$m US$m US$m US$m
Assets
Loans and advances to banks and
customers .............................................. 796,350 798,165 622,325 624,969
Debt securities – non-trading ..................... 149,199 150,496 130,922 132,594
Equity shares – non-trading ....................... 4,681 5,613 5,304 6,217
Other participating interests ...................... 881 1,255 690 764
Liabilities
Deposits by banks and customer accounts . 777,296 775,190 643,558 643,611
Debt securities in issue .............................. 189,930 192,861 127,555 128,359
Subordinated liabilities .............................. 37,688 39,561 25,462 26,889
Non-equity minority interests .................... 102 95 4,604 4,600
The fair value of derivative financial instruments is the same as their carrying value under US GAAP.
(o) Earnings per share
Basic earnings per share under US GAAP, SFAS 128 ‘Earnings per share’ , is calculated by dividing net income
of US$12,506 million (2003: US$7,231 million; 2002: US$4,900 million) by the weighted average number of
ordinary shares in issue in 2004 of 10,916 million (2003: 10,429 million; 2002: 9,339 million).
Diluted earnings per share under US GAAP is calculated by dividing net income, which requires no adjustment
for the effects of dilutive ordinary potential shares, by the weighted average number of shares outstanding plus
the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential
ordinary shares in 2004 of 11,063 million (2003: 10,547 million; 2002: 9,436 million).
(p) Variable interest entities (‘VIEs’ )
Nature, purpose and activities of VIEs with which HSBC is involved
HSBC, in the ordinary course of business, makes use of VIE structures in a variety of business activities outlined
below. The use by HSBC of a VIE structure in a business transaction is primarily to facilitate client needs and is
thus commercially driven. Utilisation of a VIE occurs after careful consideration has been given to the most
appropriate structure needed to achieve HSBC’ s control and risk allocation objectives and to help ensure an
efficient structure from a taxation and regulatory perspective. The main VIEs are discussed below.
(i) Asset-backed conduits (‘ABCs’ ) and securitisation vehicles
ABCs and securitisation vehicles are structures in which interests in consumer and commercial receivables
are sold to investors. ABCs generally consist of entities which purchase assets from clients to meet their
financing needs, while securitisation vehicles generally acquire assets originated by HSBC itself and provide
HSBC a cost-effective source of financing. Both types of vehicles issue interests, such as commercial paper,
notes, or equity interests to investors to fund the purchase of the receivables. Cash flows received by the
vehicles on the pool of the receivables are used to service the finance provided by investors. In certain
instances, HSBC receives fees for providing liquidity facility commitments and for acting as administrator
of the vehicle.
HSBC’ s exposure to loss generally arises through back-up liquidity facility commitments to the vehicles,
interest-rate swaps for which HSBC is the counterparty, retained or acquired interests in the receivables
sold, or through acquired interests in the vehicles themselves. In certain vehicles, the risk of loss to HSBC is
reduced by credit enhancement provided by the originator of the receivables or other parties.
In addition to securitisation vehicles disclosed here, HSBC (primarily through its North American
subsidiaries) also securitises assets through entities that are not considered VIEs, including government-
sponsored financing vehicles and vehicles considered qualifying special-purpose entities under US GAAP.
These entities are not consolidated under US GAAP although certain of them are consolidated under UK
GAAP.