Grupo Financiero HSBC, S.A. de C.V. second quarter 2007 financial results - highlights

31 July 2007

On 8 August 2006, HSBC Panama was sold by Grupo Financiero HSBC, S.A. de C.V. to HSBC Asia Holdings BV. All comparative commentary within this report is therefore on a like-for-like basis excluding HSBC Panama, as presented in Appendix A. The financial statements on pages 6-14 include HSBC Panama up until the date of disposal.

• Net income down 11.8 per cent to MXN2,439 million for the first half of 2007 (MXN2,766 million for the first half of 2006).
• Net loans and advances to customers up MXN28.5 billion, or 20.2 per cent, to MXN169.6 billion at 30 June 2007 (MXN141.1 billion at 30 June 2006).
• Total assets up MXN12.3 billion, or 4.0 per cent, to MXN319.1 billion at 30 June 2007 (MXN306.8 billion at 30 June 2006).
• Cost efficiency ratio (excluding monetary position) of 60.5 per cent for the first half of 2007 (62.3 per cent for the first half of 2006).
• Return on equity of 14.5 per cent for the first half of 2007 (20.7 per cent for the first half of 2006).

HSBC Mexico S.A. (the bank) is Grupo Financiero HSBC, S.A. de C.V.'s (HSBC) primary subsidiary, and is subject to supervision by the Mexican Banking and Securities Commission. The bank is required to file periodic financial information on a quarterly basis (in this case for the quarter ended 30 June 2007) and this information is publicly available. Given that this information is available in the public domain, Grupo Financiero HSBC, S.A. de C.V. has elected to file this release.

Results are prepared in accordance with Mexican GAAP (generally accepted accounting principles), with figures denominated in Mexican pesos (MXN). Comparative figures are presented on an actual basis, indexed to constant MXN as at 30 June 2007.

Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly owned subsidiary of HSBC Holdings plc (HSBC Group).

Commentary by Paul Thurston, CEO of Grupo Financiero HSBC:

"Grupo Financiero HSBC recorded a net income of MXN2,439 million for the six months ended 30 June 2007. This represents an 11.8 per cent decline versus the same period of the previous year.

"The results reflect the investment that HSBC is making in organically growing our business in Mexico, as we continue to build our presence and market share in this fast growing financial services market.  The costs of organic growth are showing through in higher expenses and loan impairment charges, but I am pleased to report that we are also seeing positive indicators of this investment bearing fruit, with strong growth in our customer base and loan volumes. Our customer base grew from 7.2 million at June 2006 to 7.9 million at June 2007, credit cards in circulation have increased over 721,000 to 2.2 million, while loans and advances to customers grew 20.2 per cent over the same period.

"The increase in business volumes is driving healthy revenue growth, with higher levels of interest income, fees and commissions in almost all areas of the bank, except for treasury income, where despite the strong progress that has been made in developing our global markets capabilities, revenues are below the record levels achieved in 2006 as a result of a more difficult interest rate environment.
 
"Expenses increased 10.5 per cent versus the same period last year, as we continued to invest in marketing, staff, IT and other infrastructure costs to support our business expansion, including growing the number of point of sale terminals by more than 46,000 versus the first half of 2006 as well as adding 249 new ATMs and 10 new branches during the same period. Our cost efficiency however has shown continued progress, improving 174bps to 60.5 per cent as revenue growth exceeded expense growth, despite lower trading revenues.

"As a result of strong growth particularly in credit cards, small business and self-employed lending, which grew 120.2 percent, 80.1 percent and 64.7 percent respectively, loan impairment charges were higher than the previous year, reflecting the acquisition costs of building our market presence in these segments.

"HSBC continues to invest to be the leading financial services institution in Mexico in the eyes of our customers, offering innovative solutions to better meet our customer needs, and we will continue to develop our infrastructure to improve service standards. I thank our customers and staff for their continued support."

Overview
In the first half of 2007, Grupo Financiero HSBC's net income of MXN2,439 million was MXN327 million, or 11.8 per cent, lower than the same period in 2006.

Net interest income (excluding monetary position) was up by MXN1,439 million to MXN10,141 million for the period ended 30 June 2007, a 16.5 per cent increase compared to the same period in 2006. Significant loan growth was partially offset by lower balance sheet management income due primarily to a reduction of MXN13.4 billion in the available-for-sale portfolio. The proceeds from this reduction have been invested in consumer and small business loan growth.

Net fees and commissions were up by MXN688 million to MXN4,963 million for the six months ended 30 June 2007, a 16.1 per cent increase over the same period in 2006. The main growth drivers were an increased number of credit cards in circulation, a rise in customer transactions and the continued success of the bank's packaged products, Tu Cuenta (for personal customers) and Estímulo (for business customers). This strong performance offset a decrease in fees resulting from a change in accounting rules in 2007 where origination fees are now registered in net interest income. In addition, point of sale, ATM, payments and cash management services, mutual funds, and trade services also contributed to growth in fee income.

Trading income at MXN777 million was 22.1 per cent lower compared to very strong performance during the same period of the previous year which benefited from favourable market conditions. Although income picked up during the second quarter of 2007 driven by solid results in retail foreign exchange, derivatives and debt trading had reduced revenue opportunities due to the flat yield curve.

Administrative expenses of MXN9,610 million in first half 2007 were 10.5 per cent higher than in the same period in 2006. Expense growth was primarily driven by a combination of higher staff and marketing costs incurred to support business expansion. Personnel expenses increased as a result of the 1,862 new employees hired since June 2006, pay rises and increased incentive costs related to higher revenues. Information technology improvements and investment in the expansion, relocation and renovation of the branch and ATM infrastructure have also contributed to expense growth. With cost growth below the rate of revenue growth, however, the cost efficiency ratio (excluding monetary position) improved from 62.3 per cent in the first half of 2006 to 60.5 per cent for the same period in 2007.

The robust increases in credit card, self-employed and small and medium business lending balances led to an increase in loan impairment charges of MXN2,143 million, compared with the same period in 2006, to reach MXN3,815 million. This however is affected by an additional MXN272 million in the second quarter of 2007 relating to methodology changes to recognise the risk associated with the loan portfolio when the quarter ends on a non-working day as it did in June. In addition, in accordance with Mexican regulation in 2006, HSBC Mexico assigned MXN569 million of general reserves to fulfil loan portfolio requirements in the second quarter of 2006. Considering the above effect, underlying year-on-year growth in loan impairment charges of 70.2 per cent is in line with the strategy to develop a market leading position in credit cards, self-employed and small business lending.

Delinquency rates rose during the period, as the loan book grew, reflecting the acquisition costs of organically growing the lending business. In addition loan underwriting criteria and collections strategies are regularly reviewed to maintain the quality of the portfolio.  HSBC has maintained a solid allowance for loan losses as a percentage of impaired loans of 146.2 per cent as at 30 June 2007.

The bank's capital adequacy ratio remains sound at 13.8 per cent.

Business highlights

During the first half of 2007, the bank's Personal Financial Services (PFS) segment generated significant business growth, with the opening of some 199,000 new Tu Cuenta packaged products, over 381,000 new credit cards issued and higher balances in credit cards, mortgages, self-employed and payroll products. Strong revenues were generated in credit cards, ATMs and fees from Tu Cuenta.  Continued growth in mutual funds was reflected by a MXN7,413 million rise in funds under management versus the previous year, and a 24.3 per cent increase in customer numbers.

In Commercial Banking (CMB) there was strong asset growth driven by a combination of higher real estate balances and growth in lending to small and medium business. Improvements in the products offered to the residential and tourist construction market led to a greater market presence, reflecting HSBC's capabilities to meet the needs of its customers. HSBC's market share in trade services grew by nearly four percentage points to 15.0 per cent, leveraging the Group's geographical presence and product capabilities.

The international business centre, which supports Mexican businesses in expanding internationally and foreign companies in investing in Mexico, has had a successful first half of 2007, with approximately 853 inward and outward referrals generated and 143 new accounts added.

In Corporate, Investment Banking and Markets (CIBM) there was strong performance in retail foreign exchange. However despite this and income generated from the sale of securities from the available-for-sale portfolio, there was a reduction in fixed income, interest rate and balance sheet trading revenues due to the uncertainty in the local market with regard to interest rate policy, as well as an extremely flat yield curve in recent months. Corporate banking is joining up customer segments and product lines both locally and internationally, having supported several deals with London and New York during the first half of 2007, while payments and cash management services continues to cross-sell to the corporate customer base.

In March 2007, HSBC Mexico successfully issued its first residential mortgage-backed security (RMBS) for MXN2,500 million, in two series and with a term of 15.9 years. This issuance was the largest of its kind in Latin America and obtained AAA(mex) and mxAAA grades assigned by Fitch Ratings and Standard & Poors, respectively.

About HSBC

Grupo Financiero HSBC, S.A. de C.V. is Mexico's fourth largest banking and financial services institution with 1,360 branches, 5,533 ATMs, approximately 7.9 million customers and more than 23,000 employees. For more information, consult our website at www.hsbc.com.mx.

Grupo Financiero HSBC, S.A. de C.V. is a 99.99 per cent directly owned subsidiary of HSBC Holdings plc. Headquartered in London, UK, the HSBC Group serves over 125 million customers worldwide through 10,000 offices in 83 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of US$2,150 billion at 30 June 2007, HSBC is one of the world's largest banking and financial services organisations. With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by nearly 200,000 shareholders in some 100 countries and territories. HSBC is marketed worldwide as 'the world's local bank'.

For further information contact:

London
Karen Ng     
Group Media Relations   
Telephone: +44 (0)20 7991 0655  

Danielle Neben
Investor Relations
Telephone: +44 (0)20 7992 1938

Mexico City
Roy Caple     
Public Affairs     
Telephone: +52 (55) 5721 6060  

Peter Sanborn
Investor Relations
Telephone: +52 (55) 5721 5347