HSBC 2005 Annual Report Download - page 177

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local discretion in a number of areas for
determination by local regulators. The extent to
which requirements will diverge, coupled with how
the FSA, HSBC’s home regulator, and the local host
regulators in the other countries in which HSBC
operates interact will be key factors in completing
implementation of Basel II. In view of this ongoing
uncertainty, it remains premature to establish with
precision the effect of Basel II on HSBC’s capital
ratios or how the competitive landscape will change.
One example of regulatory uncertainty relates to the
US, where banking supervisory authorities have yet
to produce draft rules (termed Notice of Proposed
Rulemaking). They are now expected to be
published in the first half of 2006. The US
authorities have decided to apply the advanced credit
and operational risk methodologies of Basel II only
to the largest US banks and holding companies,
although other banks may decide to opt in. HSBC
North America Holdings Inc. (HSBC’s highest level
US bank holding company in the US, which holds all
HSBC’s major US operating subsidiaries and HSBC
Canada) has been mandated to comply with these
rules. For smaller US banks, the US banking
authorities are considering applying an updated
version of the existing Basel I rules (dubbed
Basel Ia). The Basel Ia rules may also be used in the
determination of Basel II capital floors during the
transition period (2009-11).
Capital management
It is HSBC’s policy to maintain a strong capital base
to support the development of its business. HSBC
seeks to maintain a prudent balance between the
different components of its capital and, in HSBC
Holdings, between the composition of its capital and
that of its investment in subsidiaries. This is
achieved by each subsidiary managing its own
capital within the context of an approved annual plan
which determines the optimal amount and mix of
capital required to support planned business growth
and meet Group and local regulatory capital
requirements and, in the case of HSBC Finance, its
ratings targets. Capital generated in excess of
planned requirements is returned to HSBC Holdings,
normally by way of dividends, and represents a
source of strength for HSBC.
HSBC Holdings is primarily a provider of
equity capital to its subsidiaries. These investments
are substantially funded by HSBC Holdings’ own
equity issuance and profit retentions. Major
subsidiaries usually raise their own non-equity tier 1
capital and subordinated debt in accordance with
HSBC guidelines regarding market and investor
concentration, cost, market conditions, timing and
the effect on the composition and maturity profile of
HSBC’s capital. The subordinated debt requirements
of other HSBC companies are met internally.
HSBC recognises the impact on shareholder
returns of the level of equity capital employed within
HSBC and seeks to maintain a prudent balance
between the advantages and flexibility afforded by a
strong capital position and the higher returns on
equity possible with greater leverage. In the current
environment, HSBC uses a benchmark tier 1 capital
ratio of 8.25 per cent in considering its long-term
capital planning.
Source and application of tier 1 capital (Unaudited information)
2005
US$m
2004
US$m
Movement in tier 1 capital
At 1 January .................................................................................................................................... 67,259 54,863
Consolidated profits attributable to shareholders of the parent company ......................................... 15,081 11,840
Add back: goodwill amortisation ................................................................................................ –1,818
Dividends ........................................................................................................................................ (7,750) (7,301)
Add back: shares issued in lieu of dividends ............................................................................... 1,811 2,607
Increase in goodwill and intangible assets deducted ........................................................................ (1,631) (3,088)
Preference shares issued .................................................................................................................. 1,405 –
Ordinary shares issued ..................................................................................................................... 690 581
Innovative tier 1 capital issued ........................................................................................................ –1,983
Other (including exchange differences) ........................................................................................... (2,462) 3,956
At 31 December .............................................................................................................................. 74,403 67,259
Movement in risk-weighted assets
At 1 January .................................................................................................................................... 759,210 618,662
Movements ...................................................................................................................................... 67,954 140,548
At 31 December .............................................................................................................................. 827,164 759,210