Grupo Financiero HSBC, S.A. DE C.V. third quarter 2008 financial results - highlights

31 October 2008

• Net income for the nine months to 30 September 2008 was MXN3,613 million, down MXN315 million or 8.0 per cent compared with MXN3,928 million for the same period in 2007.
• Total operating income (excluding loan impairment charges) for the nine months to 30 September 2008 was MXN28,670 million, up MXN3,268 million or 12.9 per cent compared with MXN25,402 million for the same period in 2007
• Net operating income for the nine months to 30 September 2008 was MXN1,638 million, down MXN1,294 million compared to the same period of 2007.
• Net loans and advances to customers were MXN177.1 billion at 30 September 2008, down MXN9.6 billion, or 5.2 per cent, compared with MXN186.7 billion recorded at 30 September 2007.
• Total customer demand and time deposits were MXN241.9 billion at 30 September 2008, up MXN3.4 billion or 1.4 per cent, compared with MXN238.5 billion at 30 September 2007.
• The cost efficiency ratio was 58.5 per cent for the nine months to 30 September 2008, compared to 60.1 per cent for the same period of 2007*.
• Return on equity was 12.8 per cent for the nine months to 30 September 2008, compared with 14.8 per cent for the same period in 2007.
• At 30 September 2008 the Bank's capital adequacy ratio was 12.6 per cent. The Tier 1 capital ratio at the end of the reporting period is 11.2 percent.
• At 30 September 2008 the Bank continues to report strong liquidity ratios, maintaining a solid position in its customer deposit business and a loan to deposit ratio below 100 per cent.

* For comparative purposes, the monetary position results has been excluded from the 2007 figures

HSBC Mexico S.A. (the bank) is Grupo Financiero HSBC, S.A. de C.V.'s (HSBC) primary subsidiary company 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 September 2008) 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 effect from January 1, 2008, in accordance with Financial Information Standard B-10, "Effects of Inflation", the effects of inflation in financial statements cannot be recognized. This is due to the change from an inflationary to a non-inflationary economic environment. The comparative figures of the financial statements of periods prior to 2008 are expressed in monetary units with purchasing power at December 31, 2007.

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

Overview

Mexico is an important market for the HSBC Group. It occupies a strategic position linking north and south America and has one of the highest GDP per capita figures in Latin America. Only 25 per cent of Mexico's 100 million plus population has access to a bank account and it is one of the fastest-growing markets for financial services in Latin America, as demonstrated by the success of HSBC Seguros. Through Premier and other initiatives, HSBC in Mexico is rapidly reaching into the more affluent sector of the market and continues to offer outstanding international capability to its commercial and corporate customers, where our market share continues to grow.

Grupo Financiero HSBC, S.A. de C.V's performance in the nine months to 30 September 2008 has been affected by the ongoing volatility in the global economy. As we reported at the end of the first half, economic deceleration, inflationary pressures, market volatility and the global credit squeeze continue to affect our business.

Grupo Financiero HSBC's net income for the nine months ended 30 September 2008 was MXN3,613 million, MXN315 million less than for the same period in 2007. Our insurance subsidiary HSBC Seguros, accounted for 21.8 per cent of total net income.

In line with the local market trend, credit quality, particularly in the credit card portfolio, continued to deteriorate in the third quarter of 2008, which has led to an increase in provisions.

Net loans and advances to customers decreased by MXN 9.6 billion from MXN186.7 billion in September 2007 to MXN177.1 billion in September 2008, largely as a result of government loan prepayments and a reduction in the mortgage portfolio through securitization.

Net interest income in the nine months to 30 September 2008 increased by MXN2,545 million, reaching MXN19,062 million, a 15.4 per cent growth compared with the same period of 2007. Enhanced product pricing contributed to this improved performance, especially in the credit card and commercial portfolios.

Net fee income was MXN8,656 million for the nine months ended 30 September 2008, an increase of 9.1 per cent compared to the same period of 2007. This was driven mainly by increased trade services business, membership programs, credit cards, investment funds, trust services, points-of-sale and ATMs.

Trading income was MXN952 million for the nine months ended 30 September 2008, largely unchanged from the same period in 2007. Trading income levels were maintained primarily by strong performance in foreign exchange transactions.

Administrative expenses increased MXN1,493 million or 9.8 per cent for the nine months ended 30 September 2008 compared to the same period of 2007. This increase is largely attributed to one off redundancy expenses, increased marketing expenses for packaged products, investment in technology infrastructure and higher costs associated with loan recoveries. These initiatives have been complemented by a change in the branch opening hours to improve service and our customer's banking experience by, for example, reducing waiting times. Despite these measures our cost efficiency ratio* improved 1.6 percentage points to reach 58.5 per cent. Excluding the effect of non-recurrent personnel expenses, the growth in administrative expenses reduces to 7.5 per cent compared to the same period of 2007 and the cost efficiency ratio would be 57.3* per cent.

Other net income and expenses for the nine months to 30 September increased by MXN1,290 million reaching MXN2,733 million compared with the same period in 2007. This is primarily due to non-recurring income arising from the sale of shares in VISA Inc. and the sale of Mexican Stock Exchange shares in the second quarter as a result of public offerings by those entities.

Consistent with market trends, loan impairment charges increased by MXN3,710 million or 56.6 per cent in the nine months ended 30 September 2008, compared to the same period of 2007. This increase is due to higher delinquencies experienced in an environment of economic deceleration, especially in respect to consumer lending, particularly credit cards.

HSBC's allowance for loan losses as a percentage of impaired loans was 122.1 per cent at 30 September 2008, compared to 144.8 per cent for the same period of 2007.

Adjustments to credit underwriting models have also been implemented in order to improve portfolio credit quality, achieve greater control and streamline collection processes in order to ensure improved risk management. In addition, regular reviews of the credit quality of new business continue and we ensure close control of customer acquisition channels.

The government loan portfolio continued to decrease and is MXN16,505 million lower than 30 September 2007. This is due to customers paying early.

At 30 September 2008 the Bank's capital ratio was strong at 12.6 per cent. The Tier 1 capital ratio at the end of the reporting period was 11.2 percent.

In line with the policies and strategies, Grupo Financiero HSBC S.A. de C.V. management remains focused on maintaining sufficient liquidity levels in the current uncertain and volatile market environment. Our loan to deposit ratio is below 100 per cent and we continue to adopt a conservative approach to asset and liability management.

Business highlights

Personal Financial Services (PFS) focused on implementing strategies to improve service quality both through our branch network and alternative distribution channels. Changes in branch opening hours were introduced and new ATMs were installed and existing ATMs were upgraded. New pricing strategies for products and services have been introduced which are leading to improved contribution to our results. Two new savings and investment product offerings were launched in September: "Cuenta Flexible HSBC" and "Cuenta Ahorro HSBC ", which are tailored according to customer needs and offer a comprehensive package of services.

In addition the mortgage product "Hipoteca Cero " promotion was launched in the third quarter of 2008 which focuses on strengthening our long-term relationship with customers by providing a competitive solution.

Commercial Banking (CMB) total operating income increased 2.5 per cent compared to same period in 2007. This growth was largely due to an increase in the loan portfolio, as we continue to support our customers within the limitations of a conservative approach to the credit quality of new business.

We further developed our Small Medium Enterprises (SME) segment by establishing new distribution channels and focusing on the sale of packaged products, which is reflected in higher sales during the quarter.

Our market share in factoring services has increased from 22 to 26¹ per cent compared to the prior year as a result of the implementation, promotion and development of new products.

Strategies have been implemented to offer greater convenience in our services by migrating our customer's transactions to direct channels such as telephone and Internet service centers.

¹ Source: HSBC analysis based on Mexican Association of Financial Factoring and Related activities Statistical Bulletin, figures at August 2008.

Global Banking and Markets

During the third quarter of 2008, some Mexican companies had to contend with margin calls and pronounced volatility in international markets. In spite of the difficult conditions the performance of Global Markets remained resilient and generated positive results in derivatives and foreign exchange activities.

During the period total income from Global Banking recorded a 14.5 per cent increase compared with the same period of 2007, driven primarily by fee income, continued success in Project Finance infrastructure transactions and in Debt Capital Markets activity. HSBC has attained a leading position in both of these strategically important areas. In addition, compared to the prior year, revenues were higher in Trade Services, Trust, and Factoring; and by growth in new business lines, such as Custodial Services.

Operating profit before provisions experienced growth surpassing 46 per cent over the same period of 2007 driven by the above factors, as well as by non-recurring income resulting from the sale of our equity stake in the Mexican Stock Exchange.

Subsequent events

As a result of the recent turbulence in financial markets, particularly the volatility of the peso against the dollar, the financial outlook of our credit portfolio will be assessed under this new economic scenario. However the impact of this assessment is not considered material with regards to the Bank's financial position.

On 2 October 2008, the Bank issued MXN1,818 million subordinated debentures, which qualifies for Tier 2 capital. If this issue were included, our capital ratio would increase to 13.4 per cent.

About HSBC

Grupo Financiero HSBC, S.A. de C.V. is Mexico's fourth largest banking and financial services institution with 1,251 branches, 5,878 ATMs, approximately 9.2 million customer accounts and more than 20,200 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 128 million customers worldwide through 9,500 offices in 85 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of US$2,547 billion at 30 June 2008, HSBC is one of the world's largest banking and financial services organizations. HSBC is marketed worldwide as 'the world's local bank'.

For further information contact:

London
Richard Lindsay 
Group Media Relations 
Telephone: +44 (0)20 7992 1555

Danielle Neben
Investor Relations
Telephone: +44 (0)20 7992 1938
 
Mexico City
Roy Caple 
Public Affairs 
Telephone: +52 (55) 5721 6060 

Yordana Aparicio
Investor Relations
Telephone: +52 (55) 5721 5192