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HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
HSBC Strategy Update
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HSBC Strategy Update

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  • 1. HSBC Holdings plc Strategy Update Transcript DATE: Friday, 23 November 2007 CORPORATE PARTICIPANTS Stephen Green Group Chairman, HSBC Holdings plc Michael Geoghegan Group Chief Executive, HSBC Holdings plc Douglas Flint Group Finance Director - HSBC Holdings plc Stuart Gulliver Chief Executive Officer, Corporate, Investment Banking and Markets & Group Investment Businesses CONFERENCE PARTICIPANTS Ian Smillie ABN Amro – Analyst John-Paul Crutchley Merrill Lynch – Analyst Robert Law Lehman Brothers – Analyst Tim Sykes Execution – Analyst Arturo de Frias Dresdner Kleinwort Wasserstein – Analyst Sandy Chen Panmure Gordon – Analyst Anthony Broadbent Sanford C. Bernstein & Co. – Analyst Manus Costello Merrill Lynch – Analyst 1
  • 2. FORWARD-LOOKING STATEMENTS This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations and business of the Group. These forward-looking statements represent the Group’s expectations or beliefs concerning future events and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our Annual Report. PRESENTATION Stephen Green Ladies and Gentlemen, welcome to our Strategy Update and thank you for joining us on a Friday afternoon. We want to kick off with a presentation. It’s a reasonably full presentation so I hope you’ll bear with us. My apologies for starting late but we wanted to give you all a good chance to get in here and get settled. I’ll – I think I’ll kick off. I’m going to start then I’m going to hand it over to Mike at one point in the presentation and pick it up and afterwards we’ll take questions from the podium. Let me begin with the usual cautionary words on forward-looking statements and move on to our agenda for the day which is an introduction to where we’re at and why we’re doing this, a section on how we’re shaping the business taking for- going forward which I want to take you through, then I’m going hand over to Mike to talk about how we’re joining up the company for superior performance and then I’ll summarise. [Slide 1.01: HSBC Group - We are the world’s local bank] Well, what are we? We are to use our strap-line we have majored on for many years now, the world’s local bank. What do we mean by that? We mean that we’re the largest international and emerging markets bank. We have a wide spread international network. We have a uniquely international customer base and a point that’s perhaps worth mentioning in these times, unquestioned financial strength defined by the way, not only by our tier one ratio, but also by our leverage ratio. [Slide 1.02: Building on HSBC’s heritage – We have consistently created strong value] And I think it’s just worth looking backwards for a moment, although this presentation is going to be a forward-looking one. But it is worth looking backwards to the journey that we’ve come on essentially since we’ve bought Midland bank and therefore, the early ‘90s to the present day, compound manual growth of 23% of our market capitalization. It is interesting that in 1991, our market capital was just $8 billion which, by the way, was almost exactly the same as our tier one capital at that point, nowadays our market capital is over $200 billion and is over twice our tier one capital. 2
  • 3. And you can see from that little analysis on the right hand side of that chart how that has moved from an opening position of $9 billion through the same profits of $55 billion newly issued capital, on acquisitions translations effects and so forth. But see how we’ve built up the company very substantially over the period since the purchase of Midland Bank. [Slide 1.03: Our global outlook – Our strategy is aligned with trends that will shape the global economy] But it’s not enough to look backward plainly. I mean, these – one of the reasons why, when I took over chairmanship, we were determined that we were going to review the strategy and refresh it, was that we recognized that in recent years the TSR has been an underperformer along, of course, with many big cap companies, but nonetheless, an underperformer. And we recognized that maybe not all of the diversification we had done had performed as well as we would have liked it to. There’s an obvious business issue in the United States that we’re all aware of. Therefore, it was I think, time for a number of reasons to take stock of where we were at and work out what was the right way, and building on these real strengths that we have to take the company forward. And so working both with the top management team and with the Board, we launched this refreshment of our strategy. We took the Board through a major offsite at the beginning of this year and we worked through the strategy and we have since the results for ‘06 been talking through the course of this year about we need for strategic focus and it’s that’s what I want to dwell on and talk a little more about in the course of the next half hour or so. Where do we start from? We start from our view of what’s going on in the world. And the first of three mega trends is that emerging markets are going faster than rich ones. Not, I think, a surprise to any of us although I think we do need to remind ourselves just to the extent that this is true. Ten years ago, the emerging markets were 35% of world GDP, now they’re a little over 40% and on current trends, they’ll be about half of world output in about 10 years’ time. The second trend in the world, well established actually for many decades, shows no sign of stopping, is the world trade grows faster than world GDP as rapid as world GDP has been, world trade growth is faster. And then the third one is that the world is becoming more and more conscience of is the fundamental change in demographic profiles which is not just a characteristic of mature economies but also the emerging markets. It is actually interesting to note that even in the less developed countries the percentage of people over 60 is rising. Now it’s fair to acknowledge that’s very strongly influenced by China’s particular demographics. But even if you take a country like India where the percentage is rising, the absolute numbers are rising fast. So those are the three major trends and what we wanted to do is to make sure that our strategy for success going forward is built up on two things actually – our own heritage, and any company starts with a history and heritage and things that are in-built in the matrix of its being, if you will, and secondly those mega trends in the way in which we think we can build successfully on them. [Slide 1.04: Building on HSBC’s heritage – Out strategy is focused on delivering superior growth and earnings over time] 3
  • 4. What is our heritage? As a bank which began in Hong Kong and Shanghai in 1855 with Asian trade origins, to this day, Commercial Banking in the trade services that we provide at the heart of that are very much at the core of the being of the company. Deep roots in many geographies and a whole series of companies, but we were the first bank. Not just the first foreign bank, but the first bank. That international management culture which characterizes, I think, to this day. I think there’s many who would know us, would recognize. I think that’s an important fact about our heritage that I strongly believe is a source of competitive advantage going forwards. And last, but absolutely not least, and again, a healthy thing to be reminded of in current market circumstances, the financial strength which has always characterized the company and which has always, from my money, and absolutely essential policy ingredient, in what makes us strong and what gives us the basis for continuing strength. [Slide 2.01: Shaping the business – We are reshaping to focus primarily on high growth economies] I then look at how we’re going to move forward and I want just to dwell for the moment on our strategy and the way in which we’re shaping the business to make sure we can deliver superior returns going forwards. The first point is a very simple one which follows from those mega trends I just talked about. We want to make sure that our presence which is already one that builds on those trends, is aligned with those global trends going forward. It means specifically the next point that we will invest primarily in the fast growing emerging markets going forwards as we reshape our business. When we look at our developed markets business, we will focus those to build particularly on those parts of the customer base which have international connectivity for which our international connectivity is particularly meaningful. And lastly, and I have already said it, we are going to continue to make sure that we’re a very strong bank in terms of capital and balance sheet. That leads on to the question how we’re going to execute this. I think that what we clearly need to demonstrate to our owners, going forwards, is that we can join up this remarkable platform to make sure the whole is more than the sum of the parts. There’s a lot in that in terms of how we leverage the brand. One of the world’s most rapidly increasing brand by brand value in terms of financial services, how we leverage that and our net worth to grow our revenues, how we use scale to maximize efficiency, and how we align objectives and incentives to make sure that our people, which, to use a cliché, but clichés are often clichés because they are true, the people are our most important assets, how we align our objectives and incentives in management to get to that possible degree of engagement. These are key themes. And Mike is going to talk about those in more details in a few moments. Just to focus now in a bit more of that second column of that last slide – shaping our business – we are re-shaping, as I’ve already said, to focus primarily on the high growth emerging markets for the world. 4
  • 5. If you look at our results over the last four halves, you can see a pattern whereby the emerging markets, which are the red colored slices of the pies, have grown from 40% in the first half of ’04 through to about half in the first half of ’07. And what I want to see is that continuing to trend upwards in the general direction of a 60/40 split between emerging markets and develop market presences. [Slide 2.02: Shaping the business – Inter-connectivity is increasing… being at both ends matters] Interconnectivity is increasing across the world and it’s one of the characteristics of the modern globalizing world that’s important to us. And so we look at the trends of linkages between developed and emerging, emerging and developed. The obvious point, places like China are the workshops of the world selling goods to America. Financial flows going in the opposite direction. There are an increasing number of emerging markets to emerging markets flows of both the trade and investments that are important to us. I think that particularly Brazil. That’s a little picture of the combine harvester, selling not only food but also, of course, iron ore into the steel mills of China. And then there are some developed and developed linkages which are important to us given our particular footprint. I have singled out, in this particular case, the Eurostar which reminds us that we have an important customer base on both sides of the channel and where there are obvious opportunities, particularly in the Global Premier offering of which we will talk later to exploit the connectivity. These connectivities are becoming more and more like spaghetti around the world. It is no longer the case of a simple story of poor counties selling goods to rich countries who invest in the poor countries. Life is becoming much more multiplexed than that. And I think the opportunities through a network which is implanted in 83 different countries to build on that is a tremendous one that we’ll be focusing on as we take the business forwards. [Slide 2.03: Shaping the business – business models which define our ‘right to win’] We think that there are three primary business models that define our so-called ‘right to win’. Firstly, businesses with international customers where emerging market connectivity is critical. I would single out our CIBM business and we’ll talk later about that business. But the point – the real strength of that CIBM business for us is precisely this that we have international customers there, some 4000 of them, and we have an emerging markets connectivity with is of interest to them. It is a distinctive calling card. Similarly with our Private Banking, we have 90,000 customers and a very strong calling card there is the international connectivity and the emerging markets footprint. Also when you look down towards the next tier of customers on the commercial side, the Commercial Banking customers, the top end of the Commercial Banking customers and the top end of the Personal Financial Services, the Global Premier market, we will come back to those – the same point, international customers with emerging market connectivity is a calling card which gives us real competitive strength and therefore it’s a business model where we think we have, to coin the phrase, the ‘right to win’. 5
  • 6. The second model is businesses with local customers where efficiency can be achieved through global stay. I refer, in particular, there to on the commercial side, the SME sector and on the personal side, the mass market Personal Financial Services, the 120 million in one case, the 2.7 million in the other. I’ll talk more about both of those in a second. And then the last model is product where global scale is critical to effectiveness by which we mean efficiency, expertise and brand strength or count. And there we have two particular products that I single out as important given our actual strength. One is credit cards and the other is direct banking. [Slide 2.04: Defining our natural advantage: Corporate, Investment Banking and Markets] Now that we talked through each of these main customer groups briefly, before I hand it over to Mike, firstly, CIBM : emerging markets led financing focused wholesale bank. That’s our game plan. That is our strategy. You’ve heard both myself and Mike and Stuart, who sitting at that the front table, talk about this in recent months, we’re positioned for the next wave of global growth. What we see happening is that with the rise of Asia and actually also the Middle East, you’re creating whole new capital markets that are no longer centered just on London, New York. The center of gravity is shifting eastwards and our historical strength and current position mean we’re well placed to benefit from that shift. It’s aligned with our global network and our emerging markets presence. It plays particularly to the franchises we have in Asia and the Middle East and becoming, still, Latin America, too. It is clearly the case and we will recognize it with both Asia and the Middle East. They’re becoming sources of investible funds and it is absolutely no longer the case for those investible funds are looking only at Europe and America for investment. One of the most obvious things that you hear, and I was in both those places within the last three weeks, is about the so-called new silk-road as each side is looking at the other one for investment opportunities. Global product scale is important in those products which we believe are essential to this kind of offering and therefore markets and transactional banking products. And London and Paris between them are two main European-bases for product creation our strong global product innovation centers in which we have gotten good platforms. Last but not least in this area, of course, is the balance sheet, is the underlying strength that’s derived from a balance sheet which is strong in terms of both capital and liquidity means that we can do interesting things for clients when it matters. [Slide 2.05: Defining our natural advantage: Private Banking] We come to Private Banking – a world leading international Private Bank is not the biggest of course – you’ve go the two other Swiss Private Banks. We are actually the third largest after those two and the distinctive characteristic of our Private Bank is that it is integrated in a unique distribution framework. It’s a customer base that builds very substantially and increasingly so on inter-group referrals particularly from Personal Financial Services and Commercial Banking. 6
  • 7. It’s a business which has a critical ability to source and distribute not only HSBC products, but actually other people’s products within what we are very fundamentally committed to a global open architecture framework for serving those clients. It is crucially a business which has both an onshore network and an offshore competence. We’re upgrading our Private Bank through 94 offices in 37 countries. We have a Swiss based global platform. We have onshore franchises in high growth markets that are fully aligned with our Group platform. [Slide 2.06: Defining our natural advantage: Commercial Banking] Commercial Banking – this is, I think, without any dispute, the leading international business bank. We have a franchise of 2.7 million customers around the world which, as far as we can see, is unique, larger by margin than anybody else’s. We aim so far as we can and as relevant to the customers, of course, to capture both ends of customer activity. We have developed a network of international banking centers now across 23 countries and will continue to extend that out. The strength of the franchise is represented – is reflected – in the balance sheet commitment to this business, accounts of over $200 billion; customer loans of over $186 billion. This is interesting being a net deposit generating franchise. It’s also an incubator for other businesses. It’s an incubator of CIBM. Some of these customers migrate into the CIBM franchise. It’s an incubator for Personal Financial Services connectivity. There are a number of illustrations from our being able to do the personal business of the employees for Commercial Banking customers and it’s obviously, and I think very importantly, an incubator for Private Banking planned basis. We now have a cross-border referral system. Referrals are growing very rapidly. We see 37% up in the first half of this year. And it leverages our global scale in terms of transactional products. They’ll actually run out of CIBM, but the CMB client bases are very important users of transaction products: receivables, finance, business direct – these are the kinds of products where we can bring to their global scale for competitive efficiency in serving this extremely attractive client base. [Slide 2.07: Defining our natural advantage: Personal Financial Services] I come lastly to Personal Financial Services and lastly because I think it’s important for us to get very clear with you about what we are doing and what we’re not doing in Personal Financial Services around the world. We believe that there are four winning models, if I can use that phrase, in terms of developing our PFS business going forward. Firstly, in emerging markets where we have or can build or acquire scale. Examples of that point include places like Mexico, Brazil, Turkey, Panama, Saudi Arabia. These are all countries where we currently have and we know we can build out or acquire further scales in Personal Financial Services. 7
  • 8. I don’t mean to imply that we necessarily would acquire but there are obvious opportunities in many of these cases for organic development of the business and attractive market – model one. Model two – markets that I call mature markets. Though I could debate whether Hong Kong is or isn’t a mature market, but it’s clearly a relatively affluent one and it’s also obviously one where we have an extremely strong position for all sorts of recognized historical reasons. But markets where we have scale and we believe there are two in particular which are both large and ones in which we have scale – Hong Kong and, of course, here in the U.K. There are other smaller ones where we have scale, i.e. significant market share, just to show you it isn’t only the big ones we thing about, we think about places like Bermuda, Malta – these are both material markets. They’re small, of course, and we have significant scale in them in terms of market share. In terms of customer set – model three – there are certain customer segments which straddle countries and where we have a strong international connectivity as important to the client and we have an ability to do as well. This is the Global Premier franchise that is critical, I believe, and which we will talk about a little later. And then lastly, there are certain monoline products where global scale is critical to effective performance and we’ve got it. Consumer finance particularly focused on cards is one example and direct banking is another. Crucially at the bottom of that page, there are some emerging markets where it’s important to have options for moving what is now, if you will, a combination of three plus four into one as regulations evolve. China’s is one obvious example of that. India’s another obvious example of that. At the moment, regulations restrict what you can do. We need to make sure that we’re positioned as and when and if regulations evolve, as well as having existing attractive models based around three and four which fit within the regulatory climate of those two countries and one or two others too. [Slide 2.08: Defining our natural advantage: Personal Financial Services – Emerging Markets] To elaborate, if you look at emerging markets, i.e. model one, we can further analyze them into different kinds of positions depending on where we stand. These are emerging markets, the horizontal axis is the maturity of that market – just remember, these are in the context of emerging markets – from low to high represented by income per head, and then at the side, the nature of our presence in terms of presence: limited, middle or strong. And we classify our emerging markets businesses as you can see, into essentially three types of business – ones where we have strength in markets that are relatively maturer, still being emerging markets though, where we think there’s an opportunity for strength in our market share to further develop a platform as the customer’s needs continue themselves to evolve. The obvious big example in our case is Mexico, another smaller but interesting one is Panama. You look at the middle category where income per head isn’t quite so high, where our presence is more limited but where the regulatory environment does permit us to grow either organically or by acquisition, and therefore if it’s – depending on the very specifics of the particular country would look at – which is going forward is the right one for us, but in general, our propensity is to invest the growth when you look at places like Turkey, like Brazil, like Indonesia. Then you have the last category which has come under the heading of those models which – where the current regulatory environment doesn’t enable you to have a model one but where you position yourself, 8
  • 9. you do some things that are interesting on the models three and four, and you position yourself for one, if and when it evolves. India and China, I’ve already mentioned. Vietnam, I think, is another rather exciting example. As an aside, I think Vietnam now is about where China was 15 years ago. [Slide 2.09: Defining our natural advantage: Personal Financial Services – Mature Markets] So defining our natural advantage in terms of PFS and mature markets – that’s model two – mature markets where we have got scale and our objective is to keep the robust position in selected markets where we can do it. My best example, since I’m not going to talk about Hong Kong at the moment, in a sense you probably know a lot about our business in Hong Kong, I want to talk about the U.K. where we’re ranked fifth of all – fifth overall. We have a sustained market share, a sustained market position. We’re not losing market share, in some respects, gaining a little. We have a strong market share in core products, current accounts, credit cards. We have a very strong flow of deposits and high value current accounts. We have what we believe and we’ve done a lot analysis of this, to be a business that has some very attractive demographic characteristics. Compared with the market average, our demographics are relatively young and have a relatively high income. We have some distinctive propositions. The HSBC brand, we know, from the kind of focus work that we do on it, is regarded strongly and particularly regarded by those for whom international connectivity or general outward looking is an important feature of the proposition. We scored very highly on that kind of measure and on global capabilities. We have opportunities for growth in this market. And I am not going to stand here in front of you and tell you all we have done all of this and score ourselves 10 out of 10 to get the benefit. I’m saying actually the things we can do to strengthen our position and that provides us opportunities for growth in the market which is overall highly profitable even if we think the profitability may gradually weaken somewhat given systemic changes taking place in these markets. It is, in fact, worth noting that our existing PFS business is at its core a very profitable one. We believe that there are opportunities through operating efficiency to realize additional benefits by using the global operating model more effectively. We believe that there are opportunities that come from a sharper segmentation and distribution to align ourselves more clearly against the profitable – or relatively profitable – parts of the customer base. And we think, in particular, there’s an opportunity for a distribution-led strategy of targeting high wealth management and insurance business – I’m sorry, high growth wealth management and insurance business. I say that because if you look at our current growth, we’re actually relatively light on those things given the strength of our fundamental position as measured by current accounts. So the point about U.K. is that it’s a profitable business at its core. We think that we have some particularly attractive characteristics in our customer base and we think there are some obvious opportunities for us to do a good job of improving our position and therefore get growth within what is otherwise overall, obviously, a rather mature market. 9
  • 10. [Slide 2.10: Shaping the business: summary – Focussed on delivering superior growth and earnings over time] So in summary before I hand over to Mike, we’re reshaping the business to focus primarily on the fast growing and emerging markets, trending in the direction of 60/40 as percentage split over time. Interconnectivity is increasing as a feature of the world. Being on both ends of the connectivity, we believe is important as a source of competitive advantage and we will continue, therefore, to build on our strong position in the midst of the world’s fastest growing trade and investment flows. CIBM, the emerging markets-led in financing focused profile, positioning us for the next wave of global growth in the capital markets. Private Banking, the key is to be the leading international private bank which has integrated into a unique distribution network and building on the inter-group referrals that are there over time. Commercial Banking, we are the leading international business bank. We need to do a really good job of strengthening those international linkages and making them work for the client and therefore, of course, for the bottom line and for the shareholder. And lastly, PFS, to use our global scale and local knowledge to grow profitably in selected markets using the business models that give us the ‘right to win’ and clearly this does not mean, maybe we have sometimes sounded in the past, that we want to be or all things to everyone everywhere. This is a focused PFS strategy for both emerging markets and for selected developed markets. What I’d like to do now is to hand over Mike to you to take us through how we are to join the company up to deliver on that reshaping of the business. Thank you. Michael Geoghegan [Slide 3.01: Joining up – What is joining up?] Thanks Stephen. Stephen’s just outlined the direction of HSBC going forward. I’m going to explain what we’ve been doing to join up the company. First let me spell out the rationale of joining it up. I’m driving this agenda to increase revenues in each of our customer groups and to increase connectivity between them. We’ve just – we’re joining up to achieve scale and efficiencies in our operations and we’re focusing on joining up our people across the HSBC Group by creating universal high performance culture. The way you will see this coming through is rising revenue, lowering cost income ratios, positive jaws, and a greater mix of technology spent for the slowing cost trend. Nobody should imagine that joining up the company will be easy. But it’s worth endeavoring to do so. And we will do so. [Slide 3.02: PFS: scale and local knowledge to grow in selected markets – Global Premier: unbeatable global proposition] Let’s analyze the customer groups in more detail starting with PFS. 10
  • 11. HSBC is best placed to provide mass affluent customers with a proposition that follows them across borders. With Premier, customers enjoy a constant experience and recognition no matter where they are in the world allowing them to manage their credits and investments holistically. We believe we can move from 2 million Premier customers today to 6 million by the end of 2011 achieving average revenues per customer of over $1000. We aim to attract 2 million new Premier customers to bank and in upgrading a further 2 million existing customers to Premier. We aim to increase revenues from them as we deliver more services on their behalf. [Slide 3.03: PFS: scale and local knowledge to grow in selected markets – Credit cards: a leading global proposition in cards building on our global presence and scale economies] HSBC is a top five issuer of credit cards globally with more than 120 million cards in force and of those, 75% are on the same global platform. We are aiming to take that to 90%. This means that we can operate in any market as a low cost provider either directly as HSBC or on behalf of our partners. Our competitive advantage also lies in cutting-edge analytics and marketing that allows us to cross sell consumer finance and banking products to those same customers. [Slide 3.04: PFS: scale and local knowledge to grow in selected markets – HSBC Direct – build business model in one market and deploy many] Heading to our direct proposition, we’ve had marked success in the USA with $12 billion in deposits, 90% of which are new to bank. Our research shows that amongst our target audience of confident savers, the HSBC Direct website ranked significantly better than the competition. Seventy four percent of direct customers say that our site is much better or somewhat better than the competition. For ING, the market leader, the figure is only 57%. We have now rolled out this model to Taiwan and South Korea and we plan to expand into other markets with strong saving pools. [Slide 3.05: Commercial Banking: the leading international business bank – We are uniquely positioned to serve both ends of customer transactions] In our efforts to be the leading international business bank, we’re leveraging our unique network across 63 countries and territories and offering customers end to end transactional services. We’re on target to have 50 international banking centers by year end. TheseIBCs serve customers needing cross border facilities and aim to make it just as easy for them to open accounts overseas as is it as home. At the same time, our corporate international teams and the network of 250 global relationship managers are providing solutions to address customers’ international needs. These relationship managers made over 3000 business referrals in the first half. That’s up 37% against the prior year and growth is continued at the same level in the second half. 11
  • 12. [Slide 3.06: Commercial Banking: the leading international business bank – We are employing our global expertise and local presence ‘to be the best bank for small businesses in target markets’] Meanwhile, SMEs are fueling growth in many countries especially in emerging markets. In China, SMEs account for 78% of total non-agricultural employment. In India, they account for 95% of manufacturers and about 50% of exporters. Our own research shows that 40% of SMEs are doing business internationally and that figure is rising. We are already partners with more than 2.5 million SMEs around the world, companies that could be the big corporates of the future. This is all about focusing on a few core products and delivering them to the right customers at the right time through the right channels and using straight through focusing 24 by 7. In most countries, we have received significantly more deposits from SMEs than we lend which helps with our overall self-funding strategies. Now we will transfer our credit knowledge from mature economies to emerging markets as it becomes possible to introduce scoring models in these places. We have an award winning receivables finance business now offered in 17 countries with more countries scheduled to roll out over the next two years. [Slide 3.07: Commercial Banking: the leading international business bank – Global platforms provide us with a leading scalable customer proposition] We’re also potentially – seeing potentially expanding Internet banking offers where the customer take up and transaction volume rising online. In fact, we already have 1.3 million commercial customers registered for business internet banking. It puts customers in control. It gives them the information they need when they want it. We recently upgraded our business international banking platform and are introducing a second generation platform which we call B2G. When customers log on to this new technology, they are seeing messaging tailored to their behavioral patterns and offering targeted products and services. This platform is rolling out across the group delivering significant cost savings and higher transaction volume. And we’re building on both the internet mobile phone technology to increase customer convenience. In the UK, business customers can now receive mini statements to their mobile phones and we intend to take this to many more countries. In Turkey, we are the first bank to use secure signatures by mobile phones to verify payment instructions. We’re also going to export this. In France, we launched online leasing and online card applications come on stream early next year. At the same time, our global platforms serve more than just one customer group. The card platform, for example, is used by CMB and PFS. HSBCnet is used by CMB and CIBM customers. 12
  • 13. [Slide 3.08: CIBM: emerging markets-led and financing focus – Implementing our refined strategy] Now moving on to CIBM – our strategy is to be a leading wholesale bank that is emerging markets-led and financed focused and it’s working. First we are honing the business by concentrating on enhanced financing capabilities, improving credit process and focusing the number of sectors with full investment banking coverage. Second, closer working within the group in delivering strong relationships with CMB customers and Group Investment businesses are benefiting from the expertise emerging markets. And third, benefiting from the scale through our global transactional platform and a higher staff level in global service centers. [Slide 3.09: CIBM: emerging markets-led and financing focus – Multiple product emerging markets leadership….] CIBM is the leader in multiple products across emerging markets and you can see from these awards and tombstones that we’re not dependent on any one P& L line, something we regard as a source of great strength. It makes the business more resilient to changes in product or market demand and offers more ways to leverage HSBC’s distribution network. [Slide 3.10: CIBM: emerging markets-led and financing focus – …developed markets product strength] CIBM has always been very successful in building our product suites in developed markets. As this slide shows, CIBM is leader in several product areas including foreign exchange, derivatives and cash management. [Slide 3.11: CIBM: emerging markets-led and financing focus – We have rolled out our Asian financing model with great success to other emerging economies] At the same time, CIBM is extending the hub-and-spoke model into Latin America, the Middle East and emerging Europe. This model has been fully tested in Asia where CIBM has already demonstrated the ability to deliver growth. And the mandates won in these geographies are testament to the success of rolling out our model. [Slide 3.12: Private Banking: a world leading international Private Bank integrated into a unique distribution network] Let me now turn to the Private Bank. This business started with a major acquisition in 1999 and has achieved very strong growth and profits during the last five years. Boasted the third best Private Bank by Euromoney for the last two years, we’re steadily building brand recognition and we will be investing more on marketing in the future. We’ve also been investing in a number of onshore emerging market locations where HSBC has strong presence including Brazil, Mexico and parts of the Middle East. Next year we’re opening China and Russia. 13
  • 14. These new offices represent one form of joining up, intragroup business involving the Private Bank is another, where UK cross referrals from PFS and CMB have accounted form more than 40% of new customers. And when it comes to special expertise, the Private Bank is one of the market leaders for selecting hedge funds for clients. With a recent Morgan Stanley reports putting us at the top five in this market. Better still, Euromoney voted us number one for our trust business in Asia an area which has been developed from the acquisition of Bank of Bermuda. [Slide 3.13: Insurance: aim to double PBT contribution to 20% - A three-step plan building on our core strengths] In the case of Insurance, the opportunity is there to double our profit before tax to 20% of the Group. Quite simply, our current low penetration means we should be able to grow the business substantially. Our plan for achieving this has been in three key elements. First we aim to build on the Group’s distribution capabilities, to service the life, pension and investment needs of our existing wealthier customers. Second, we will use Group expertise to roll out creditor protection and third, we will leverage the Group strength to create strategic alliances as we’ve done already with the likes of AXA and AIG. [Slide 3.14: Global Transaction Banking provides a globally scaled product suite for CIBM and CMB customers] Let me now turn to Global Transaction Banking which goes to the core of HSBC’s heritage of servicing trade and our ability to leverage our international network. It’s that network which enables us to provide customers with payments and cash management and trade services as well as security services which are essential of the sub custody business in Asia. Again the story here revolves around ability to provide global propositions and our successes are reflected in the numerous awards. It also comes down to global systems and straight through processing. For example, our global payment system is now delivering a higher level STP on a higher volume. [Slide 3.15: Technology and services – One HSBC – build once, deploy many] Let’s take a look at technology which is clearly transforming the financial services industry and is a cornerstone of joining up HSBC. We need to be there for our clients 24 by 7. We need to have a consistent proposition whether our clients come to us via the internet, to our branch or one of our call centers. For this to work, our customers and our employees need the same information on the same screens. That’s the first step. Once we’ve achieved that consistency, then we’ll reengineer the back end processes. On top of this, I want us to roll out six totally standardized products worldwide – two assets, two liabilities and two insurance products. This vision is what we call One HSBC. [Slide 3.16: HSBC IT continues to provide strong economies of scale] HSBC also owns the world’s largest privately operated integrated corporate network which we believe to be unique among major international banks. 14
  • 15. It has allowed us to be efficient in the deployment of IT expenditure and the roll-out of our global platforms is reducing our operating costs, cutting unit costs of production, by 10% each year. [Slide 3.17: Global Resourcing – One of the largest ‘business and knowledge entity’ in financial services evolving from lift-and-shift to re-engineering] Turning now to our Global Resourcing, we have over 29,000 people employed in 15 centres in five Asian countries. Our offshore operations have progressed from having a label cost rationale to the development of centers of excellence for high value added functions. Our Global Service Centers rank as the world’s third largest offshore operations with $210 million in costs incurred in the first half of 2007 and a specter of these service centers represent, we believe, a significant lower cost that would’ve been incurred had these operations been located in high cost countries. [Slide 3.18: Our organisation and our people – Our people, our culture – the best place to work] The final aspect of joining up involves our people, more than 315,000 of them. It’s testament to the expansion of HSBC that around 1 in 5 now work in South America, while 1 in 9 are based in mainland China and Hong Kong. Our diversity is one of the best features of our corporate culture. But we’re also working to strengthen that culture in other ways. Next year, we’ll be introducing a uniformed performance management framework across the Group to ensure that we really identify our best performers. In the same way, we’re introducing a balanced scorecard to provide performance management for our top 200 leaders worldwide. We’re also investing in improving the leadership skills necessary to implement our business strategy and operating plan. The bottom line here is to maintain our culture whilst being more performance driven, more progressive and more international all of which are underpinned for HSBC’s integrity. We will measure the vitality of HSBC’s culture through the annual survey of all our staff with the first of these completed earlier this year. And this will serve as a baseline going forward. [Slide 3.19: Measuring and creating the right incentives – Our performance metrics] Not only are we measuring staff engagement, but we’re developing additional metrics and some of the examples are in front of you. We’re currently firming these up and we’ll share more of the details with you in March. In the meantime, the process of joining up is demonstratively underway. We have achieved a great deal already but there is much much more to do. It is up to us to deliver the same first class experience for customers no matter where they are in the world. We are determined to make HSBC’s unique distribution capabilities work for every one of our customers and to deliver on our promise of being the world’s local bank. 15
  • 16. Now let me hand you back to Stephen. Stephen Green I thank you. Maybe just a few quick points in summary. [Slide 4.01: Capital strength – HSBC’s trademark – Consistently strong Tier 1 capital ratios] First if you go back to a point that I already mentioned, we certainly intend to maintain that policy that has been in place for a long time for a strong balance-sheet position, strong capital, strong balance sheet. We’ve demonstrated over many years now consistently strong Tier one capital ratios - you can see that not only in terms of the ratio, but also richness in the mix and I might add, though it’s not on this slide, I’ve already mentioned it, that our leverage ratio compares very favorable with market norms and we intend to keep that that way as well. And I think current market circumstances are reminding us all of the importance of this key element in our policy. [Slide 4.02: Building on HSBC’s heritage – Our strategy is focused on delivering superior growth and earnings over time] To sum up, really, this slide kind of brings us all together – our heritage, I’ve talked about that, the Asian trade up origins, the deep roots in so many geographies, the international management culture, the financial strengths, the mega trends I referred to in emerging market growth, world trade, longevity and all that implies in financial services. Some key themes about we are reshaping our business to benefit from those – that heritage and those trends in terms of CIBM and the emerging markets focused strategy, Private Banking’s integrated nature of that business with our footprint, Commercial Banking and leading international position, Personal Financial Services, those specific models we will build on and not where we don’t have those in place, and the Insurance opportunity. And lastly, the joining up that Mike has been talking about for the last few minutes to leverage the brand and the network to us scale for efficiency and to make sure that our people are engaged. [Slide 4.03: HSBC Group – We are the world’s local bank] I leave you, really, with this last slide which was also my first. We are the largest international emerging market’s bank. We have a wide spread international network. We have a uniquely international customer base, in terms of geographic profile and also psychological outlook. And lastly, but absolutely not least, we have unquestioned financial strength. Thank you for listening to us. What I’d now like to do is invite my three colleagues here – Mike, obviously, Douglas, the Finance Director, Stuart, the head of our wholesale banking, to join me on the podium and we’ll be very happy to take questions. Yes if I could ask you to raise your hand and identify yourself please, yes. 16
  • 17. QUESTION AND ANSWER Q1: Financial metrics Ian Smillie This is Ian Smillie from ABN Amro. And you set out a clear view for the long term strategy of the Group and could I ask you to go into a bit more detail on what Mike alluded to towards the end of his presentation in terms of the financial metrics that we should use to judge your performance. And also, I guess, so that you can judge your own performance. So should we be thinking about this being a revenue growth story? Is it a return on capital story? Is it a total shareholder return story? How do we put the vision that you set out into numbers on near-term performance? Stephen Green Well we will come back to you as we mentioned in the results presentation in March for the full year and tell you more about this. But to me, there is no one single metric that is an appropriate one for management incentivization. We believe that it’s got to be something about profitability and capital usage and return on capital. It’s got to be something about growth clearly for the last amounts that you want to see good TSR performance, you also, by the way, want to see earnings growth with enabled good dividend growth. So there’ll be a number of things and not one single financial metric. It also won’t be just financial metrics, of course. Operationally there are a number of milestones that we want to put in place. We mentioned some of them today – the 6 million in Premier for instance. And there’ll be others. And we will talk about not necessarily all of them. I think it would be wrong to publish some of them in the public domain and we’ll start doing that in particular at the results session. Iain Smillie Sorry, just to follow up, can we look forward to NT setting a specific target as the full year results by which we will then be able to judge future performance? Stephen Green Certainly some operational targets. I’m not sure whether we’ll want to put specific financial targets. I know – this is a work in progress. We’re thinking about it now. And like I said, we will come back to you at the results session with some more – with an open approach to how we’re going to approach financial and operational metrics. Now I hope you would understand, some – there are some metrics which you want management to be guided by internally that you won’t necessarily want to commit to in public and there are others that we would be happy to put out in public. Iain Smillie Thank you. Stephen Green 17
  • 18. Douglas, do you want to add anything to that? Michael Geoghegan I think we can say it is a change. We are going in that direction where we haven’t been before describing the – defining which targets will be the work in progress as the Chairman said, but we we’ll come to you in March and give you some of those targets that we’re expecting to achieve. Stephen Green I also don’t want to be unrealistic about it. You see, mainly – committing to a particular, for example – committing to a particular TSR performance in one year is not something that I don’t – you really want and I don’t think it’s sensible. It’s important to get this right. We’re working on it and we will come back to you in the results presentation. And there will be – some of this that we’re going to use, we will talk about what the measures are that we are using to incentivize and drive management implementation. We may not necessarily put all of them in the public domain, but we will put some of them. Q2: Shape of the US business going forward and PFS revenue targets John-Paul Crutchley Good afternoon sir. This is John-Paul Crutchley from Merrill Lynch. Two questions, one on the financials but also maybe one strategically first on the U.S., the North American business. You presented us with a strategy update and of course the last proper strategy was set back in ’03, Managing for Growth. I think back then your goal for North America was to be one of the top five financial institutions by profitability, to be a low cost producer and to attract and retain the best people. Now clearly events have overtaken to get to where we were then, you’re in a work out position in terms of apart from the U.S. business, but I was just wondering if you could maybe update us going beyond that work out process to what you think the right size, shape of your U.S. business will be going forward because it seems that that’s quite a critical part of the puzzle which you haven’t talked about at all here. And I have a second question, if I can after that, in terms of the PFS revenue goals in terms of targets. Stephen Green Okay John-Paul, let me just talk a bit about the U.S. and let me come back and probably let Mike talk to you on the PFS revenue targets. The U.S. is clearly an area where we had some business issues that will be no secret to anybody and a lot of water has flowed under the bridge since ’03 for all sorts of reasons, partly clearly the mortgage services business didn’t work out the way we would have wanted, there are issues in the current market. We talked about them in our trading statement a couple weeks back in terms of the consumer lending business. And I think overall our profile in America isn’t balanced. We’ve got some businesses in the consumer finance area that are quite large and broadly spread across the states. 18
  • 19. We’ve got a bank that is very concentrated on New York and whilst is has a very strong position in New York itself, New York is a slow growing market. We have been developing some presences but they’re still rather modest in places like Florida and California in terms of banking. I believe there are some other things and we will – this is another thing that is a work in progress and we will be coming back to you on. You understand what I mean when I say markets are difficult at the moment in terms of how fast you can develop opportunities. We’ll have to see how the markets go, but the opportunity, I think, is there and this goes back to what I was saying about making sure you build in a mature market in a way which focuses on international connectivity lie with three kinds of customer base – Asians, South Asians and Hispanics – for reasons that are assumedly obvious. Now in the case of Asians, I think we’re pretty well placed already. In the case of South Asians, we’ve made quite a good start because it’s a relatively small segment. The big issue, the big prize, the big opportunity for us is Hispanics. I say big opportunity because of our linkages with Mexico and Central America in particular. San Diego, for instance, is – has one third of the population of El Salvador living there. We all know the pattern – we – I don’t think we’ve done much of a job yet along the lines that we could do developing a proper franchise to provide services to those customer bases. And to be clear, what’s happening there is that the Hispanic market is becoming more and more mainstream. The connectivity with the likes of Mexico is still very important to the customer base and we’re doing some research on this now. I think it may lead to some development of community banking in appropriate areas but there are two things that I want to say that we will not do. First of all is, there is in no part of our minds to withdraw from the U.S. The U.S. is an important market for us. And secondly, we will not go and buy a major banking business in the United States either. There is an element of reshaping of our business that we have to do. That’s not about waving magic wands, as it’s probably a multi-year transition, but I want to see us get to – and I don’t want to put a timeframe on it – but let’s say, five years-ish, for the sake of discussion. A time when we can honestly say to you that we’ve got a U.S. business that’s properly duck tailed with the rest of Group strategy. I don’t think we’ve ever really had... John-Paul Crutchley Just a follow up question, maybe one more for Mike. It’s actually – it seems to me, in terms of the joining up presentation, Global Premier seems to be the core linchpins of that, and I just want to make – just talk this through so I can think about it the right way –you talked about potentially initially 2 million customers new to bank and 2 million of upgrades, $1000 at least in revenue per customer, now it seems to be talking sort of around the $4-3 to $5 billion of revenues incrementally. But in the PFS business which makes about $50 billion revenues per year, that doesn’t really seem to be much of a step, shift forward, especially given that’s a multi year out to the 2011 target, it just seems a bit potentially under ambitious against to know how you’re trying to present your opportunity out there. Am I misreading something or is there more to come? Michael Geoghegan 19
  • 20. Well I don't know if you say it's not ambitious but let’s get those customers first know we'll come back to you and see how many more we can get. But you're right. It is only represents 3% market share. I think we said there are 200 million people who have that type of profile across the world. But I think the other thing you have got to remember is that two things. One the type of customer you are talking about. Minimally you're talking of $1000. The longevity of these customers are for more -- the ability to cross sell is far bigger. So those are things you feed into it. And I think also some of the PFS revenue being looked at would not be there in the future; as we look at some of our consumer finance revenues, those will not be gone. So I think actually the percentage is larger than you portray at the current time. But let's get that percentage -- or let's get that revenue before you can come back and give you more after that. Q3: Disposals or withdrawal from products, markets or segments; more efficient use of capital; business volumes coming from the global footprint and comparisons to local peers. Robert Law Robert Law of Lehman. I have got two areas I would like to explore. The first one is a bit of a follow-on from JP's question. I think he talked about the U.S. I wanted to broaden it out in terms of the area of disposables or withdrawal from products, markets or segments. You did not really cover that in your presentation. What is your attitude -- but there were some fairly obvious areas of your business which were not identified as high-profile or investment areas, one of which was obviously the U.S. What is your attitude to withdraw disposal or more efficient use of capital in areas which are not regarded as priority? Stephen Green What I hope is that you will see us over time demonstrate a much -- a pretty tough-minded attitude. If there are areas of business, you will understand when I say I cannot necessarily reveal the scope of everything. But if there are areas of business where we think capital is not earning a return and there's nothing we can do to restructure the business to make it earn a reasonable return, then we will follow through the logic of that. Robert Law And the second area I wanted to move on to was the proposition of the presentation has been the value from the global footprint from the proposition that you have to your customers from that. Could I ask you to venture how much of your business volume or revenue comes from activities that this footprint gives you other banks could not offer? That was the first one. And secondly, in terms of the efficiency ratios perhaps that's an easier question to answer, how do you benchmark yourselves compared to local peers? And do you think you are competitive in terms of efficiency with your peers? And if so, if you are not, what is the difference and what are you going to do about that? Stephen Green There is a layer of questions there. On the first one, that itself is, you have to kind of split it into the different customer groups, one of which is CIBM. Stuart can comment on what we get from a connectivity. And the other is Commercial Banking. Mike, you might want to -- then can we come back to the efficiency question? Stuart Gulliver 20
  • 21. Honestly, I could say the majority of our competitive edge aside from products skill set actually comes from the fact we're in 83 countries. It actually is all about cross-border and it is also about economies of scale that say developing a derivative platform in London and Paris and being able to sell product in 67 dealing rooms around the world. So I think both economies of scale, innovation and indeed our competitive edge is all about cross-border. And they are not a series of domestic-domestic businesses that you just sum together. It is the cross-border element. Now putting a percentage on the PBT of CIBM is something I would not want to do this afternoon because it would be reasonably unscientific. But my own belief from having been in this business for 27 years is well over half of the PBT of CIBM comes from the fact that it's an international business and it drives cross-border deals. Even within Asia-Pacific, where there’s 19 countries, a phenomenal amount of our business activity is driven cross border within Asia-Pacific. Stephen Green What I would not want to leave you with the impression, Robert, is that we think we have got it all right now. I don't know where to score us on a scale out of one to 10, but it certainly is not 9 or 10. What I do think therefore is that there's a lot of potential to do more. We talked in a different way about insurance and our low penetration rate. If I talk about the amount of times we missed things that we could reasonably have referred across geographies, I don't know how big that is. What I do know is that the referral rates in Commercial Banking have been rising very rapidly, 37%. Frankly, that is off a base that was too low. So I think there is a long way to go. When you press us to quantify it, it is hard to do. Can we talk about efficiency? Michael Geoghegan The first thing when you look at efficiency across the world, you look at the 83 different countries, let's just take credit cards. You have 56 million cards in North America. What you do by joining that together is make the example that Stephen talked about earlier, where El Salvador might have 88,000 cards. You no longer operate in that country as 88,000 cards operations or the back office that goes with it. You add the 88,000 to 120 million. We have a unit cost of production significantly below the competition as you go into battle against that market that you are going into. And that is the key of all the things HSBC has to do when it does an acquisition or goes into a market. It has got to recognize that obviously there are big local players. What we've got to bring is big local -- global advantages locally. And that is what we're working on. Robert Law Could I come back on that? I mean I appreciate the principal and I can see that in certain product lines you would have economies of scale like that. But what I'm after is, is that showing at a group line at the moment? Because if I look at your cost income ratio at a group number (technical difficulty)-- I would argue that perhaps it does not show large efficiencies of scale compared to local competition. Michael Geoghegan A few points, firstly we have been investing. So when you look at the cost-income ratio, we had two alternatives. It was either go out and acquire multiples of fixed or go and grow locally geographically, and that is what we have done in a large number of countries. So I think what we have managed to keep is our cost to income ratio at a sustainable same level the whole way through. Certainly, if you look at the slide we talked about technology, we said we are dropping our unit costs 10% per year and that is quite a powerful statement to make. We're driving through that because we're having more and more systems that are global systems. Sixty-three countries in our universal banking system hub. That is the type of way 21
  • 22. we get the advantages. If we strip out all the investment, yes, we can take the cost-income ratio down much quicker. But we did not do that. That is the easy way to do it. We're here to invest in the long-term. Stephen Green Just to be clear on that statistic, which is shown to be very powerful, it is 10% reduction in unit cost of transactions. The amount of transactions of course per customer rises as customers get more active. So it does not translate directly into a 10% reduction in the cost-income ratio or in unit costs of a customer relationship. But it's a very powerful driver nonetheless of efficiency. And again to come back to a point that I made, Robert. None of us would want to sit here and say, we have exploited all of the opportunities. I do not think it is in the current P&L at least some of it is, the CIBM point; Private Banking referrals are in the current P&L. What I think is much more interesting is what is not in it but which is achievable given our platform. And that comes back to the management task for the next three, four years of really joining this up and as it were ringing the sponge on the cost side and driving the revenue side through the joining up. Q4: Current world outlook and impact on efficiency if in a slowdown scenario; US experience and transfer of knowledge to emerging markets expansion Michael Helsby Thank you its Michael Helsby from Morgan Stanley. The world looks like it has changed a little bit since you had your off-site and you decided on your strategy. Stephen Green We all noticed that. Michael Helsby Yes, I do not know if it is just me but this presentation does not capture any of that and certainly that is my perception it does not capture any of that. I was just going to say, what are you going to do differently if world trade does not grow like it says on your chart? You know how are you going to react to that slowdown and how does that impact your comment on efficiency and jaws in a slowdown scenario? Stephen Green Well, I think it is important to distinguish between a slowdown which is a temporary cyclical event and something which undermine the fundamental trends. I'm not of the view that anything going on currently is going to slow for the next decade world trade growth. But it might slow it next year, yes, possibly. So there are issues about what do you do if we enter into a much slower world growth scenario for a year or so driven off the back of U.S. recession, which is the specter behind it all. And that would have consequence, and I will come back to that. But I do not, to be very clear, I think -- so we think these trends are ones that are well embedded for the next generation. We're not talking about there will be cyclical moves around them. There will be times when world growth grows more strongly than it is sustainable. That I think has been the case for the last three years. There will be times when it grows a little slower than its sustainable trend. We may be about to enter into that now. But I do not believe that the fundamentals of a world economy which is shifting towards emerging markets over time and a world economy which is shifting towards a more open policy over time, world trade faster than world growth, I don't think that has brought in question our recent developments. 22
  • 23. Some aspects of Capital Markets plainly are brought into question by recent developments. Stuart can talk about this -- with greater precision than I can. But I think that one of the lessons learned from current upheavals is that asset-backed commercial paper at the structured end is going to be a shadow of its former self for the foreseeable future. So there will be some changes in the profile of the markets from where companies get their profits from in market activity. One of the strengths of our CIBM businesses is that it is very customer focused. So Stuart, do you want --? Stuart Gulliver No, I think that volumes, I think as you all as analysts, kind of written down volumes for 2008 for the CIBM businesses generically as opposed to CIBM businesses specifically to HSBC. And I think as an industry 2008 will probably be challenging. But again, back to Stephen's point, that does not address the secular drivers of our business. That is much more the cyclical drivers. And secondly we have a business that is very customer focused and we have not developed a substantial structured credit CDO business. So, therefore, we will probably be less impacted because of our business model, which has rather so far been proven with our third-quarter results being flat to the third quarter of last year. Michael Helsby Can I just ask you --? Douglas Flint If I can just add, we did not build a certain degree of leverage into our business that many other market participants did. So as the world de-leverages and the banking system de-leverages, the premium on strong capital, strong funding basis I think becomes more apparent. And since that has been the traditional model we have deployed more than others I think less has changed for us, but clearly the marketplace has changed but it has perhaps changed to our favor. Michael Helsby Great, can I just add a follow-up in terms of the U.S.? Can you -- I mean clearly you talked about your challenges over there and we can all see that. But what I'm more interested in from a strategy and from an execution of strategy perspective, what you have actually learned from the last couple of years and how that is actually changing your behavior when you roll out growth into the emerging market businesses? Stephen Green Well, I think I want to answer the other part of your question on what do you do in a recessionary environment, and we will get Mike to answer it, because we are conscious; we talked about it the week before last. We have seen deterioration in our consumer lending in the U.S. and we have taken some actions. I will hand back to Mike. Why don't you --? Michael Geoghegan Well the first thing is clearly the lessons one learns is what the industry learns as well. Every model you have can only take a certain downturn in asset values. The asset values are either being driven by the consumer or they are being driven by the street. I think there's a bit of both playing here. At the current time the analytics would support full employment or very close to high employment. And all the other bits 23
  • 24. that go into that. What it does not support is when you see an LTV dropping 20% per annum. And does that mean that you sell your house if it's worth GBP3? I do not think it is. The value that somebody has put on your house. What we have got here is a question of confidence. You cannot put confidence into analytics. You can only put facts or history. You can project out. And when the confidence comes back then you will find them a robustness of that business. But the other thing about it, no one should be in consumer finance if you think it is always going to be a growth business. It has historically had a number of years of great growth and then a couple of years of deterioration. And we're going through one of those periods now. The difference with us and others is we are still here, and we will still be here when the business turns up. Others will not because we've got the strong capital base behind us. And obviously we're learning lot of things along the way in regards to collections, working out facilities for customers, finding out where the (technical difficulty) I hope you have got the gist that we've learned a lot. (technical difficulty) You asked I'm sorry, just to deal with the other, what lessons have we learned as you acquire going forward. I think that was the question in the back of your mind. I think there are a couple of things you always ought to make sure going forward. First of all we said about where we're likely to acquire primarily whether it is organic or inorganic focusing on emerging markets. Secondly you don't acquire things just because they are cheap. You need to be a strategic fit. And thirdly, frankly, you make sure that you put people into the business you acquire, so you establish the connectivity and the oversight in an appropriate manner from the first. So question? Yes, please? Q5: Acquisition for CIBM – investment banking; Shanghai listings for foreign companies; Talent; Allocation of Capital Tim Sykes First of all thank you very much for today and thank you very much for your candor. It is most appreciated. I think what you acknowledged, Stephen, is that the shares have underperformed for a period of time and that things need to change. I think what you describe is an outlook where you have a progressive evolution of the strategy that you currently have in place, but you don't – countenance a more radical transformation. You also seemed to have ruled out an acquisition. But you do have a fantastic capital base. You do have a fantastic liquidity position. And surely in this environment the game is coming towards you. Would you rule out an acquisition that could accelerate your aims by other means such as in CIBM? Stephen Green I did not rule out acquisitions. The only thing I specifically said is that we won't acquire a big bank in the U.S. or actually in core Europe, I might add. Acquisitions that we do do will be primarily in developed -- excuse me, emerging markets, developing markets. And I would not rule out any obviously. We have made an offer for KEB. So it is not that we will not do acquisitions. It is that a want to make sure acquisitions fit with the strategy. Because you don't build strategy around acquisitions. What was the third? Is the game coming towards? Well, it may do. Valuations may change over the next year or two or three. There may be opportunities that make sense so long as they meet the tests that I have just outlined, and we do. One of the tests will clearly be are we capable of handling the management implications of the acquisition? We will ask ourselves that very explicitly. But I would not want to come across as saying we will not make acquisitions. What I do want to come across is saying that we will not do acquisitions that do not fit with that overall strategy that I have outlined. 24
  • 25. Tim Sykes Sorry, I did not introduce myself. It's Tim Sykes from Execution. Okay, so we are kind of ruling out acquisitions in the U.S. and core Europe. We're not going for acceleration of CIBM so we are ruling out investing banking? Stephen Green I'm sorry, I missed the point about CIBM. Yes, we will not acquire in CIBM -- we may the odd small bolt- on thing for this or that reason, but we will not make any material acquisition in CIBM. And one thing we have been absolutely consistent on over the years is actually that point, as I'm sure you are aware. Tim Sykes Very clear. Thank you. I just thought valuations have changed (multiple speakers) Stephen Green Some valuations change for a reason. Tim Sykes As people in this room are also aware I'm afraid. Okay, so we're going to acquire in a major market possibly if valuations come towards you as they may do. So in thinking that through would you countenance improving your acquisition currency with I think the Shanghai stock exchange is thinking about inviting foreign companies to list. Would you countenance such a move? Stephen Green If the Shanghai market opens to foreign companies to list either on their main boards or as a possibility that I suspect not likely in the terribly near future or possibly through a sort of CDR depository receipt approach, we would clearly be interested and we have made that clear to all concerned, including in the mainland. Tim Sykes Excellent. Okay, thank you very much. And just lastly I do want to ask you a question about talent, but just one question on KPIs. You have a huge organization, a hugely complex organization, and many, many opportunities. And obviously you can build up sonority in many areas. Ian asked the question right at the start about KPIs, which I do think is very important for us. But I suppose the question I would have is how do you choose how to deploy the marginal unit of capital? We have just seen you put $750 million into the U.S. and you may need more. You may need not depending on what happens. How can we think through your process of allocation of capital? Douglas Flint Long-term returning capital. I do not think there is any way other way of doing it. I mean clearly there are capital needs that are based on current circumstances where you're repairing a balance sheet, which was the case obviously putting the $750 million in the United States, and that was a very clear signal and a very clear necessity. There are clear needs to support growing businesses that we have in Asia and Latin 25
  • 26. America and the Middle East, who are continually chipping away at us in terms of giving more capital because they can demonstrate they can make superior returns than other parts of the group. And then I guess you then have to make the more strategic decision as to whether there are businesses where there are opportunities either to build them or acquire bits and pieces where long-term the returns look very interesting but short term you take some dilution because the returns in the near term are going to be lower as you build the business out or you take a strategic stake. I think perhaps if the insurance investment that we're making in Vietnam, in the short-term there won't we much return. In the long term we see a huge opportunity in doing that. So (multiple speakers). Yes, absolutely. But it is the balance in aggregate as to what we can afford and maintain in aggregate a return that enables us to maintain a rating for the shares, a dividend policy that we aim to be progressive and the support from our shareholders. Stephen Green And I think the only thing I would add if I may, Douglas, is to pick back up on the point that Robert was by implication asking, that we will be tough minded. If there are areas that are currently using capital that we think have no chance of being restructured or adjusted in any way to get an adequate return if they are not currently earning one. We will follow through the logic of that. So there will be instances where we free up capital. Tim Sykes Okay, and just lastly if I can on talent. Sorry to hold the mic., but talent I think is very important. And, Michael, you talked about your talent processes and how you bringing in the uniform performance management process, and I think an engagements to be, is that a gallop study you're going to introduce - - Michael Geoghegan It is not gallop but it is something -- Tim Sykes Similar. Michael Geoghegan That has been done, yes. Tim Sykes Business leaders would tell you that these processes can take up to three years to embed, particularly for a company as large as yours. I suppose my question would be, we're three years away from that reaping returns and I believe it will, but what exists at the present time that you search out you need to change? Michael Geoghegan Well I think it's pretty -- a little bit more focused than what we've got at the current time. Let's get back to the management. We manage the Company through a number of managing directors across the world. They drive that down through their balance sheets and their P&L's in the businesses. And that obviously is implemented with the use of talent. But there's lot the different talent pools that we examine at the present time. All we’re doing is bringing is sharpness to it. Those engagement scores that we talk about, 26
  • 27. there will be different engagement scores around the world. But what we're trying to do is to make people realize is that engagement is a part and parcel of driving the share price forward. And watching that and monitoring that at the Board level and the senior team being measured on it is a way in making sure that the amount of emphasis on talent is given to at all times. It will come in over three years but I think you will start seeing change already coming through in the second year and the third year. Stephen Green But just to be clear engagement scores will be on the performance objectives of each senior manager from this January onwards. Tim Sykes Thank you very much. Q6: PBT trending to 60/40 developing, developed markets; No longer buying cheap. Arturo de Frias Arturo de Frias from Dresdner Kleinwort. I wanted to ask two questions. One is referring to these PBT pie charts that you have shown us. Particularly the one that says they are trending towards 60/40, 60 being emerging markets. My question is having in mind the various substantial impairments that you will probably have to make in the U.S., we are probably there already. I would not be surprised if second half of '07 or probably '08 and of course I do not expect you to comment on '08 numbers. I would not be surprised if we have already there. Stephen Green Or even on the full ’07 numbers. Arturo de Frias Yes, exactly. So trending towards 60/40 it sounds a bit, I don't know lackluster to me, if you want, because basically we are implying that both the mature markets and the emerging markets are going to grow more or less at the same speed going forward, which obviously is not the case. So why 60/40? Why not 70/30? Or 80/20? Stephen Green Well firstly, we are not about turning ourselves into 100% emerging markets bank. There's at least one other UK-based competitor that you can buy if you want a pure emerging markets play. That is not what we are because we believe there is an important connectivity; we talked about it in Commercial Banking, in Premier, etc. So our objective is not to become 100/0. Now frankly 60/40, 70/30 -- no, I frankly don't -- it is clearly a numerator and a denominator and under certain scenarios you could find ourselves getting there by accident in a way that would not be attractive for shareholder. Granted. But what you should take into that is a statement of real strategic intent that something like 60/40, and that’s why we have said trending towards -- I did not put a timeframe on it because I think it is a sort of target that if you put too mechanistic a framework on it, it becomes unhelpful to you, the shareholder. 27
  • 28. What you want to know is that our management thrust is to take the business from what was actually the other way around, 40/60, towards a business which is majority emerging markets because they are the faster growing ones. I frankly would not get too hung up on whether it is 60 or 65 or 55 -- just that is the trend. That is the direction we're going through for and we're following that through in terms of the way we invest both organically and inorganically. And I would not want to be telling you we only got there because the denominator to collapsed plainly. Arturo de Frias Another question would be, you have said, which I think is a very interesting statement, you have said that you have learned that you should not buy cheap (multiple speakers)? Stephen Green Merely because, merely because. Arturo de Frias In fact, we know about how cheap certain things are. But how do you learned to buy expensive? Because some things that you might have to learn are never going to be cheap. Stephen Green I think lying behind that is a thought that I would partially agree with. Namely the days may be gone when there are steals to be had in the acquisition market. And you never know. But I do think there are certain circumstances where for strategic reason you have got to be prepared to pay a fair price for something. That does not mean I hope you will believe that we have suddenly gone soft in the head when it comes to negotiating transactions. I actually think the KEB deal is a very fairly priced deal. You cannot describe it as a deal that is screamingly cheap. It is a fair priced deal. And I believe it works for our shareholders because I think there's a very clear strategic rationale for it, and because I think the economics of it do work. But that is probably -- I say probably because we really do not know, and because I mindful of the earlier point, that valuations may be changing over the next 24 months or so, and I hope you have enough confidence that if you see something that is manifestly good value and fits with our strategy, and we are confident we can manage it, we will go for it. But you have to live in the world that exists. There is a question on the Internet. Danielle, do you want to read it out? I think it's for Stuart if I read this correctly. Q7: Growth in credit derivatives Sandy Chen, read by Danielle Neben (HSBC Investor Relations) Yes, we have an Internet question from Sandy Chen at Panmure Gordon. As a follow-up on Michael Helsby's question, you say you have not developed a major structured credit CDO business. What then has driven the strong growth in credit derivatives with total notional contracts of $1.5 trillion as of the 30th of June, '07 versus $1.1 trillion at the end of 2007? Do you see a potential exposure to mark-to-market or other charges given the current market conditions? Stuart Gulliver 28
  • 29. Sure, obviously credit derivatives and notional outstandings is not a particularly good measure of any kind of risk at all. I can buy 200 and sell 200 and that gives me 400 on my notional outstandings. Secondly, credit default swaps are not the same thing as CDOs or CLOs. But we have a credit derivative business and indeed some of the growth in those outstandings will actually be hedges on our own books. So I don't think that informs at all about risk. Clearly we use a quite advanced structure of limits, actually which we have taken, Sandy, through in terms of where our exposure actually arises in this area. To the extent to which we run the trading business, yes, we are exposed to mark-to-market fluctuations and of course we are exposed, as everyone is, to counterparty risk. But I do not think we are particularly exposed in this area, and there is no aspect of this risk that we believe is sufficient to warrant special attention at this moment. Stephen Green Thank you, Stuart. Time is moving on. We're probably minutes just to get one or two more, but please. Q8: Allocation of roles to develop strategy; Growth in commodity derivatives Antony Broadbent Antony Broadbent from Sanford Bernstein. I have got a couple of questions. Firstly with respect to strategy, I wonder if you could help us to understand how you actually allocate roles with respect to developing strategy between the Group center, the customer groups, the regions, the individual banking businesses within each country? And I guess I'm thinking particularly about obviously what was a strategic error in building out the mortgage services business so quickly, and yet it was Bobby Mehta who fell on his sorts, but clearly that was his strategy he was executing. So clearly there was a local significant local component to strategy development. I would just like to understand how that actually plays through in terms of the different roles and the different parts of the organization? Stephen Green Yes, I know it is a very fair question. Although I do not think I would characterize the growth in the mortgage services business as a strategic intent, actually. But the short answer is, strategy is the responsibility of the Group and therefore at the center. Actually strategy since the last analysis with me and I have a small team that works with me on strategy development. But you do not do that in a void. I do not dream up strategies sitting in a bar. This comes from a number of sources. One of course dialogue with our investors and analysts. And I do stress I personally always enjoy and always value it. You learn through the dialogue. It's important to us. Secondly of course, the management, my senior colleagues, the Group Management Board, three of whom are sitting on this podium, and their colleagues out in Asia, in the Middle East, in Latin America, they are all people who are sitting in the midst of the business on a daily basis and they are thinking about the business, reflecting on it, thinking what are the ways we should take this forward. But they do not do that in isolation. And maybe in the past we have sometime not coordinated ourselves enough but I can assure you that we do not now do anything like that in isolation. And there is a regular dialogue. One of the focuses for that is the Group Management Board. That is a monthly vehicle that meets under Michael's chairmanship. It meets in different parts of the world, which I think is one of the important ways in which we kind of glue the thing together. The next one happens to be in Miami next week. The one after that is in London in December. And the one after that is in Dubai, and so forth. 29
  • 30. And that provides a very regular forum, face-to-face dialogue, which is clearly about daily operational matters, annual operating plans etc. But it is also about what we could do strategically. Then last but not least is of course the Board. I mentioned right at the start that the refreshment of the strategy that we have been presenting to you in the course of this year and particularly today was the result of some pretty deep thinking that went on with the Board in an off-site in January of this year. We were actually going to repeat that in January next year. And the discussions within the Board are lively and very strategic -- strategy focused. So it is a multiplex thing necessarily. But it is certainly not the case that a series of 83 different country heads doing their own strategy in an uncoordinated manner. No, in the last analysis it is the center that leads on it. Antony Broadbent Can I just push you then on why Bobby Mehta was the person that fell on his sword for the mortgage services sales failed strategy? Stephen Green Like I said I do not think that was a strategic issue. You could debate -- Household has clearly not performed in the way we would have all wanted it to. There are issues about it. There are the mortgage services issues which we talked about. We were the first to talk about what is clearly now a much more pervasive problem. We got more balance sheet in the mortgage services area than we should have but we're in it. I think there were some oversight issues in that business. But I do not think mortgage services per se is about the strategy of consumer finance, because that was one painful, but nonetheless one silo of our business whose core actually is the credit card business. Now we talked earlier about the U.S. business issue. We have unquestionably got some U.S. issues. We're still working through the mortgage services issues. We have got to continue to do that. It's effectively a work out program. As Mike was saying earlier this year it's effectively two to three years work out and current market conditions do not make life any easier. Consumer lending in common with the entire industry is deteriorating. I think everybody in this room must be a little worried about what happens to the U.S. economy. And if the U.S. economy goes into a recession it will have an impact on our business. But again to pick up a point Mike was noting the fact that consumer finance is a relatively more cyclical business is not itself a reason for not being in it strategically. And actually I take the view that if you are a bank that has a personal financial services business globally and our PFS business is somewhere not far short of half of our total business, you have to have credit card and consumer finance capability as a part of that. Antony Broadbent And I have got a second question if I may for Stuart. It is really, thinking about some of your competitors they have built up a really quite successful and rapidly growing business in commodity derivatives. And given your geographic mix and your customers, I would have thought that would be a fairly natural area that HSBC could have played a much more significant impact than it has. I just wondered if you could help us understand why you have chosen not to do that? 30
  • 31. Stuart Gulliver Sure, I think there are two issues. First of all we actually are a very large metals trader. We acquired, when we acquired Republic National Bank in New York, arguably the largest gold trader in the world. So if you look through all the trade magazines you will find that we actually rank one for precious metals. So we have a commodity business but it is a metals business as opposed to getting into soft commodities. And the second actually genuine answer is bandwidth and management capacity to actually run with several things. We've obviously restructured the CIBM business and refocused it. And there's a bandwidth issue on how much you can run with it at any one time. I would also say that it is not on our agenda for 2008 because I actually, given the rather gloomy outlook we have for the world economies, I think this is probably not the ideal time to get into the commodity business. Stephen Green There is one question over there which we probably ought to make the last one I suspect. Q7: Positioning in the UK Manus Costello Thank you. It's Manus Costello from Merrill Lynch. You talked, Stephen, in your presentation about systemic changes in the UK perhaps leading to lower returns over the longer term. I wondered if you could elaborate on that comment and tell us how you are positioning the bank to deal with that? Stephen Green I'm happy to elaborate on the systemic changes, and I will get Mike maybe to talk about how we are positioning the bank. I think that this market is undergoing a change which is driven by much more customer awareness of the various alternatives. This is an Internet-based phenomenon. But the obvious manifestation of it, that have come off the headlines a bit recently that have not gone away, is the overdraft penalty charge issue, now in front of the courts, between the OFT and the banks. It will be a year or two one suspects until we know the outcome of all of this. It could well change the economics of retail banking in this country, in direction of by unbundling, basically. I think that is the specific manifestation. The more general point is a rising ability of the customer to shop around for parts of the package. The regulatory environment has in many respects in recent years focused on the way in which banks price the services. And you have seen all sorts of manifestations of that. And I think the net outcome of that is not that retail banking in this country is going to become a low profitability business. But it is probably going to get less profitable than it now is, and therefore overall growth is going to be constrained in this market. And it is always going to be a business that attracts headlines in the media. Now I think the implication of this is careful customer segmentation and careful product focus. Mike, do you want to --? Michael Geoghegan Not much to add, actually. I think what we could add is basically it is going to be about who delivers most efficiently. Because if you want a 24 by 7 offering and you don't want it, I'm sure your children would want it. The reality is what you can do to that and get it down the same systems across all different channels. As we mentioned we are 31
  • 32. doing quot;HSBC One Bank,quot; which basically is the same screens that you see at home, you will see in the call centers and you will see in the branches. What does that really mean in fulfillment? It actually means you start taking away all those systems that are sitting there in the branches and have been sitting there for really generations and frankly are not needed in this technology driven world. And it also means that you change the type of people that actually work in your branches. You have added value propositions for people who come into your branches. So it's quite a complex thing that will roll out over a period of time. And we're looking not at this decade but the next decade as well. Stephen Green I do not think there will be as many branches and certainly not -- and they certainly will not look the same as they currently do in ten years' time. Getting from A to B is probably not a step function change. It is a gradual one -- this is on the industry I'm talking -- over a period of 10 years. But it is going to be quite a radical change. I think, Ladies and gentlemen, I'm conscious this is a Friday afternoon. You have been very patient with your time with us, and thank you for joining us. I hope you have found it useful. I hope you will carry away the impression this is a company in quite significant transition. But it is a transition to a future which I think is very good. I think we are for historical reasons advantaged, well advantaged, because of our footprint in some places we have been in a very long time that happen to be the world's fastest-growing economies. And to the point that we had a little bit of dialogue just now, this is about a secular change that is going to last frankly for 10, 20, 30 years, whatever the implications of current market upheavals for short-term macro economics. We're positioning ourselves for the long-term growth opportunity that I passionately believe exists in very large measure in some of the most exciting parts of the world. So thank you for being with us and have a very good weekend. 32

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