HSBC Bank Brasil S.A. - Banco Múltiplo

Transcription

1 Financial statements 31 December 2007 and 2006 (A free translation of the original report in Portuguese published in Brazil containing financial statements prepared in accordance with accounting practices adopted in Brazil)

2 Financial statements 31 December 2007 and 2006 Contents Independent auditors report 3-4 Balance sheets 5 Statements of income 6 Statements of changes in shareholders equity 7 Statements of changes in financial position

3 ABCD KPMG Auditores Independentes Al. Dr. Carlos de Carvalho, º Curitiba, PR - Brasil Caixa Postal Curitiba, PR - Brasil Central Tel 55 (41) Fax 55 (41) Internet Independent auditors report To The Board of Directors and Shareholders HSBC Bank Brasil S.A. - Banco Múltiplo Curitiba - PR 1. We have examined the balance sheets of HSBC Bank Brasil S.A. - Banco Múltiplo as of 31 December 2007 and 2006 and the related statements of income, changes in shareholders equity and changes in financial position for the years then ended, which are the responsibility of its management. Our responsibility is to express an opinion on these financial statements. 2. Our examinations were conducted in accordance with auditing standards generally accepted in Brazil and included: (a) planning of the audit work, considering the materiality of the balances, the volume of transactions and the accounting systems and internal accounting controls of the Bank; (b) verification, on a test basis, of the evidence and records which support the amounts and accounting information disclosed; and (c) evaluation of the most significant accounting policies and estimates adopted by the Bank s management, as well as the presentation of the financial statements taken as a whole. 3. The Bank records its operations and prepares the financial statements observing the accounting guidelines established by the Brazilian Central Bank, which require adjustment of the leasing portfolio to present value, by recording a provision for the excess or shortage of depreciation, classified as permanent assets, as mentioned in Note 3 (f). These guidelines require a classification of the operations, in current and long-term assets and liabilities, leased assets and lease income and expenses, that differs from the classification that would be required to be in conformity with the accounting practices adopted in Brazil for financial leasing operations. However, the result of the presentation of the net income for the years and shareholders equity is in accordance with accounting practices adopted in Brazil. 4. In our opinion, except for the reclassification that would be required as mentioned in paragraph 3 above, the aforementioned financial statements present fairly, in all material respects, the financial position of HSBC Bank Brasil S.A. - Banco Múltiplo as of 31 December 2007 and 2006, and the results of its operations, changes in its shareholders equity and changes in its financial position for the years then ended, in conformity with accounting practices adopted in Brazil. 3 KPMG Auditores Independentes é uma sociedade brasileira, simples, membro da KPMG International, uma cooperativa suíça. KPMG Auditores Independentes is a Brazilian entity, member firm of KPMG International, a Swiss cooperative.

4 ABCD 5. In addition, we have examined the combined balance sheets of HSBC Bank Brasil S.A. - Banco Múltiplo and combined companies ( HSBC Financial Conglomerate ), as of 31 December 2007 and 2006, and the corresponding combined statements of income and changes in financial position for the years then ended, which are the responsibility of its management. Our responsibility is to express an opinion on these combined financial statements. These combined financial statements, which are not required by Brazilian Corporation Law, were prepared to provide additional information, and were subject to the same audit procedures mentioned in paragraph 2 above. In our opinion, based on our examinations, except for the reclassification that would be required as mentioned in paragraph 3 above, the combined financial statements adequately represent in all material respects the combined financial position of HSBC Bank Brasil S.A. - Banco Múltiplo and combined companies ( HSBC Financial Conglomerate ) as of 31 December 2007 and 2006, and the combined results of its operations and changes in its financial position for the years then ended, in conformity with rules issued by the Brazilian Central Bank specifically applicable to the preparation of these combined financial statements. 22 February 2008 KPMG Auditores Independentes CRC 2SP014428/O-6-F-PR Original in Portuguese signed by José Gilberto Montes Munhoz Accountant CRC 1SP145676/O-5-S-PR 4

5 Balance sheets 31 December 2007 and 2006 HSBC Bank HSBC Financial Conglomerate HSBC Bank HSBC Financial Conglomerate Assets Liabilities Current assets 46,425,009 40,088,100 46,510,459 40,128,395 Current liabilities 31,763,132 28,596,149 31,435,401 28,533,379 Cash and cash equivalents 1,112, ,448 1,112, ,448 Deposits 20,520,668 17,570,190 18,861,546 17,279,983 Interbank funds invested 7,139,479 9,099,314 7,139,479 9,099,065 Demand deposits 7,015,442 5,069,469 7,007,366 5,064,718 Savings deposits 2,049,039 1,690,532 2,049,039 1,690,532 Money market 5,008,155 7,690,845 5,008,155 7,690,845 Interbank deposits 2,472, , , ,906 Interbank placements 2,134,386 1,411,215 2,134,386 1,410,966 Time deposits 8,833,644 10,164,443 8,833,644 10,164,443 Valuation allowance (3,062) (2,746) (3,062) (2,746) Other deposits 149,841 65, ,841 65,384 Securities and derivative financial instruments 8,359,005 4,960,444 8,385,358 4,965,283 Money market repurchase commitments 1,544,181 5,394,158 1,544,179 5,370,862 Own portfolio 3,049,171 4,265,784 3,078,775 4,327,741 Own portfolio 210, ,521 50,023 73,413 Subject to repurchase commitment 169,500 92, ,249 33,702 Third party portfolio 1,333,694 5,168,637 1,494,156 5,297,449 Derivative financial instruments 382, , , ,980 Deposited with the Brazilian Central Bank 3,743, ,474 3,743, ,474 Acceptances and endorsements 695,896 69, ,896 69,533 Subject to forward commitment 1,014,223 9,041 1,014,223 10,386 Obligations for notes and bonds issued abroad 429,379 69, ,379 69,533 Interbank accounts 5,948,830 5,194,645 5,948,830 5,194,645 Mortgage bonds 266, ,517 - Collections in transit 2,211 1,720 2,211 1,720 Interbank accounts 11,718 3,007 11,718 3,007 Term deposits Brazilian Central Bank deposits 5,941,240 5,158,904 5,941,240 5,158,904 Payments in transit National Housing System 4,483 4,019 4,483 4,019 Correspondents 11,656 2,933 11,656 2,933 Correspondents , ,002 Interbranch accounts - Third party funds in transit 721, , , ,908 Interbranch accounts - Third party funds in transit 1,955 1,070 1,955 1,070 Borrowings 2,000, ,458 2,000, ,458 Loans 16,440,221 14,712,670 16,445,278 14,712,670 Domestic 3,738 2,056 3,738 2,056 Loans Foreign 1,996, ,402 1,996, ,402 Public sector 63,322-63,322 - Private sector 17,562,178 16,002,375 17,567,286 16,002,375 Repass borrowings from public sector 408, , , ,433 Provision for loan losses (1,185,279) (1,289,705) (1,185,330) (1,289,705) BNDES (Federal Development Bank) 40,541 32,836 40,541 32,836 Lease operations 13,111 10,450 13,111 10,450 FINAME (Federal Capital Goods Financing Agency 368, , , ,597 Lease receivables - Private sector 652, , , ,427 Foreign currency repass borrowings 433, ,889 - Unearned lease income (626,340) (357,565) (626,340) (357,565) Provision for lease operations losses (13,184) (1,412) (13,184) (1,412) Derivative financial instruments 469, , , ,667 Other receivables 6,943,749 4,818,575 6,997,073 4,852,053 Other liabilities 4,956,240 3,679,795 6,287,633 3,930,528 Amounts due from honoured endorsements and guarantee Collection of taxes 15,283 17,864 15,286 17,864 Foreign exchange portfolio 3,522,683 2,517,030 3,522,683 2,517,030 Foreign exchange portfolio 2,228,066 1,753,646 2,228,066 1,753,646 Service fees receivable 239, , , ,527 Corporate and statutory contribution 354, , , ,155 Securities clearing accounts 85,232 83, , ,837 Taxes and social security payable 193, , , ,943 Other 3,139,090 2,079,502 3,148,400 2,102,030 Due in connection with securities transaction 127,330 40, , ,744 Provision for losses (43,890) (43,200) (43,890) (43,200) Subordinated debts ,583 18,284 Other 2,038,083 1,453,558 2,042,779 1,456,892 Other assets 465, , , ,711 Long-term liabilities 34,712,945 26,247,436 34,191,544 25,585,825 Temporary investments 1,330 1,330 1,330 1,330 Other assets 39,018 20,973 39,628 23,019 Deposits 26,236,972 21,934,212 25,530,554 20,445,111 Valuation allowance (4,528) (3,054) (4,528) (3,065) Prepaid expenses 429, , , ,427 Interbank deposits 711,820 1,489,101 5,402 - Time deposits 25,525,152 20,445,111 25,525,152 20,445,111 Long-term assets 19,013,326 15,012,211 19,267,485 15,252,901 Money market repurchase commitments - Third party portfolio ,263 Interbank funds invested 517,489 85, ,489 85,313 Acceptances and endorsements - Obligations for notes and Securities and derivative financial instruments 4,774,104 6,929,093 4,792,813 6,944,082 bonds issued abroad 395, , , ,411 Own portfolio 1,497,603 1,022,148 1,514,415 1,131,278 Borrowings 197,924 57, ,924 57,966 Subject to repurchase commitment 35, ,741 35,820 44,600 Derivative financial instruments 528,672 64, ,672 64,894 Domestic 16,820 20,557 16,820 20,557 Deposited with the Brazilian Central Bank 2,391,743 4,563,854 2,391,743 4,563,854 Foreign 181,104 37, ,104 37,409 Subject to forward commitment 320,266 1,139, ,163 1,139,456 Repass borrowings from public sector 915, , , ,240 Loans 8,881,085 5,393,760 8,881,085 5,393,760 BNDES (Federal Development Bank) 168, , , ,070 Loans - Private sector 9,240,109 5,626,992 9,240,109 5,626,992 FINAME (Federal Capital Goods Financing Agency 746, , , ,170 Provision for loan losses (359,024) (233,232) (359,024) (233,232) Foreign currency repass borrowings 211,069 52, ,069 52,167 Lease operations (29,159) (10,332) (29,159) (10,332) Derivative financial instruments 358,069 79, ,069 79,986 Lease receivables - Private sector 1,178, ,060 1,178, ,060 Unearned lease income (1,178,770) (474,060) (1,178,770) (474,060) Other liabilities 6,397,767 3,328,454 6,582,784 4,132,681 Provision for lease operations losses (29,159) (10,332) (29,159) (10,332) Foreign exchange portfolio 2,366, ,803 2,366, ,803 Other receivables 4,088,994 2,170,591 4,324,283 2,396,259 Corporate and statutory contribution Taxes and social security payable 440, , , ,058 Foreign exchange portfolio 2,366, ,803 2,366, ,803 Subordinated debts 1,595, ,097 1,595,418 1,340,641 Other 1,734,299 1,434,624 1,971,254 1,662,045 Other 1,995,340 1,339,681 2,016,712 1,428,143 Provision for losses (11,435) (5,836) (13,101) (7,589) Deferred income 44,622 34,611 44,622 34,611 Other assets - Prepaid expenses 780, , , ,819 Shareholders' equity 5,020,021 4,029,416 5,084,212 4,111,913 Permanent assets 6,102,385 3,807,301 4,977,835 2,884,432 Capital Investments 2,319,877 1,934,213 1,194,603 1,010,417 Capital - Domestic ,213 69,966 Capital - Foreign 2,156,628 2,146,798 2,156,628 2,146,798 Subsidiaries 2,321,020 1,935,451 1,175, ,712 Capital reserve 7,600 8,349 7,604 8,355 Revaluation reserve 4,864 1,299 4,864 1,299 Domestic 2,321,020 1,935,451 1,175, ,712 Revenue reserve 229, , , ,593 Fair value adjustment - Securities and Other investments 10,969 16,502 31,327 36,445 derivative financial instruments 54,552 19,081 54,552 19,081 Provision for losses (12,112) (17,740) (12,118) (17,740) Retained earnings 2,566,387 1,685,602 2,576,120 1,696,821 Fixed assets 203, , , ,478 Property for own use 87,589 78,097 87,589 78,097 Other fixed assets 373, , , ,924 Accumulated depreciation (257,534) (221,133) (257,909) (221,543) Leased assets 3,081,702 1,137,164 3,081,702 1,137,164 Leased assets 3,411,005 1,413,206 3,411,005 1,413,206 Accumulated depreciation (329,303) (276,042) (329,303) (276,042) Deferred charges 497, , , ,373 Deferred charges 969, , , ,251 Accumulated amortisation (472,251) (378,524) (472,760) (378,878) Total 71,540,720 58,907,612 70,755,779 58,265,728 Total 71,540,720 58,907,612 70,755,779 58,265,728 See the accompanying notes on the financial statement 5

6 Statements of income Years ended 31 December 2007 and 2006 (In thousands of Reais, except income per thousand shares) HSBC Bank HSBC Financial Conglomerate Second Second half Year Year half Year Year Financial operations income 5,813,602 11,329,035 10,661,037 5,815,453 11,332,047 10,665,774 Loans 3,757,696 7,320,169 6,854,848 3,758,306 7,320,781 6,855,458 Lease operations 565, , , , , ,770 Securities 1,114,652 2,479,654 2,562,266 1,115,893 2,482,054 2,566,393 Derivative financial instruments 13,277 (34,451) 271,434 13,277 (34,451) 271,434 Trade finance and foreign exchange 168, , , , , ,430 Compulsory loans 193, , , , , ,289 Financial operations expenses (3,594,988) (7,288,526) (7,035,508) (3,514,233) (7,135,945) (6,867,424) Deposits, money market and interbank funds (2,275,066) (4,683,113) (4,883,373) (2,194,260) (4,530,481) (4,715,289) Borrowings and repass (114,777) (181,374) (122,986) (114,777) (181,374) (122,986) Lease operations (398,723) (657,530) (326,237) (398,723) (657,530) (326,237) Provision for loan losses (806,422) (1,766,509) (1,702,912) (806,473) (1,766,560) (1,702,912) Net income from financial operations 2,218,614 4,040,509 3,625,529 2,301,220 4,196,102 3,798,350 Other operating income (expenses) (1,377,824) (2,554,472) (2,282,713) (1,498,641) (2,715,594) (2,390,401) Service fee income 1,179,386 2,318,350 2,196,278 1,224,427 2,391,224 2,229,851 Personnel expenses (935,870) (1,797,077) (1,560,527) (941,716) (1,807,629) (1,570,921) Other administrative expenses (1,574,182) (2,975,622) (2,641,814) (1,587,201) (2,993,545) (2,655,171) Transactional taxes (272,617) (533,311) (487,215) (281,482) (551,112) (503,290) Equity share in earnings of subsidiaries 270, , , , , ,032 Other income 380, , , , , ,632 Other expenses (425,032) (647,153) (574,182) (430,790) (661,093) (597,534) Operating income 840,790 1,486,037 1,342, ,579 1,480,508 1,407,949 Non-operating expenses, net 106, ,434 (18,240) 235, ,466 (18,481) Income before income and social contribution taxes and profit sharing 947,265 1,684,471 1,324,576 1,037,779 1,806,974 1,389,468 Income and social contribution taxes (123,314) (218,765) (170,720) (206,147) (330,121) (226,638) Current (222,125) (335,857) (135,793) (299,795) (442,143) (193,982) Deferred 98, ,092 (34,927) 93, ,022 (32,656) Profit sharing (134,018) (231,652) (214,667) (139,211) (237,535) (216,081) Net income for the period/year 689,933 1,234, , ,421 1,239, ,749 Interest on own capital (132,400) (257,400) (266,400) (132,400) (257,400) (266,400) Number of shares outstanding (thousands) 1,835,473 1,835,473 1,831,248 Net income per thousand shares - R$ See the accompanying notes on the financial statements. 6

7 Statements of changes in shareholders' equity (HSBC Bank) Years ended 31 December 2007 and 2006 Capital Revaluation Revenue Market value Capital reserve reserve reserve adjustment - Securities and Capital Assets in derivative financial Retained Capital increase Others subsidiaries Legal instruments earnings Total Balances as of 1 January ,929, ,920 7,671 1, ,328 34,335 1,059,126 3,371,203 Equity adjustment of stock exchange membership certificate Realisation of revaluation reserve (646) Capital increase approved 216,920 (216,920) Market value adjustments - Securities and derivative financial instruments Bank (19,483) - (19,483) Subsidiaries ,229-4,229 Net income for the year , ,189 Appropriations from net income Legal reserve ,959 - (46,959) - Interest on own capital (266,400) (266,400) Balances as of 31 December ,146,798-8,349 1, ,287 19,081 1,685,602 4,029,416 Equity adjustment of stock exchange membership certificate Revaluation reserve , ,719 Realisation of revaluation reserve from equity adjustment of stock exchange membership certificate - - (1,368) ,368 - Capital increase - 9, ,830 Capital increase approved 9,830 (9,830) Market value adjustments - Securities and derivatives financial instruments Bank ,924-32,924 Subsidiaries ,547-2,547 Net income for the year ,234,054 1,234,054 Appropriations from net income Legal reserve ,703 - (61,703) - Proposed dividends (35,688) (35,688) Interest on own capital (257,400) (257,400) Balances as of 31 December ,156,628-7,600 4, ,990 54,552 2,566,387 5,020,021 Changes for the year 9,830 - (749) 3,565 61,703 35, , ,605 Balances as of 1 July ,146,798 9,830 8,803 1, ,493 38,808 2,073,328 4,474,319 Equity adjustment of stock exchange membership certificate Revaluation reserve , ,719 Realisation of revaluation reserve from equity adjustment of stock exchange membership certificate - - (1,368) ,368 - Capital increase approved 9,830 (9,830) Market value adjustments - Securities and derivatives financial instruments Bank ,587-19,587 Subsidiaries (3,843) - (3,843) Net income for the period , ,933 Appropriations from net income Legal reserve ,497 - (34,497) - Proposed dividends (31,459) (31,459) Interest on own capital (132,400) (132,400) Balances as of 31 December ,156,628-7,600 4, ,990 54,552 2,566,387 5,020,021 Changes for the period 9,830 (9,830) (1,203) 3,605 34,497 15, , ,702 See the accompanying notes on the financial statements. 7

8 Statements of changes in financial position Years ended 31 December 2007 and 2006 HSBC Bank HSBC Financial Conglomerate Second Second half Year Year half Year Year Source of funds 7,948,349 18,725,544 13,319,910 7,690,893 18,771,262 13,499,432 Net income for the period/year 689,933 1,234, , ,421 1,239, ,749 Adjustments to the net income (42,664) (17,536) 72, , , ,733 Depreciation and amortisation 447, , , , , ,913 Variation of allowance for fixed asset (5,070) (4,917) - (5,064) (4,911) - Surplus of lease depreciation (225,949) (328,541) (65,754) (225,949) (328,541) (65,754) Equity in operating earnings of subsidiaries (270,482) (459,196) (318,453) (108,158) (239,855) (198,032) Amortised goodwill 7,998 16,445 16,895 7,998 16,445 16,895 Other 3,496 6,060 3,678 3,498 6,071 3,711 Market value adjustment - Securities and derivatives financial instruments 19,587 32,924-18,406 31,743 - Increase in deferred income 4,481 10,011 24,357 4,481 10,011 24,357 Shareholders' equity - 9, ,833 - Capital increase - 9, ,830 - Reversal of proposed dividends Third party funds 7,277,012 17,456,261 12,284,351 6,855,798 17,278,272 12,335,593 Increase in current and long-term liabilities 5,105,062 15,482,469 11,978,409 4,754,262 15,357,687 12,070,113 Deposits 2,992,294 7,253,238 8,696,958 2,641,494 6,667,006 8,660,624 Acceptance and endorsements 437, , , , , ,749 Interbank and interbranch accounts - 105, , , ,575 Borrowings and repass 1,675,235 2,495,451-1,675,235 2,495,451 - Derivative financial instruments - 544, ,338 - Other liabilities - 4,345,758 2,891,127-4,807,208 3,019,165 Decrease in current and long-term assets 1,878,698 1,543,825-1,847,206 1,543,576 - Interbank funds invested 710,293 1,527, ,108 1,527,410 - Securities and derivative financial instruments 507, , Lease operations 15,864 16,166-15,864 16,166 - Other assets 645, , Fixed assets and investment disposals 209, , , , , ,504 Fixed assets for own use 4,115 4,855 6,371 4,121 4,862 6,375 Lease properties 154, , , , , ,312 Investments 4,543 6, ,092 15, Fixed assets not for own use 46,102 62,651 46,846 47,527 64,076 46,846 Dividends received 83, ,407 84,671 33,936 89,468 44,205 Merger of Valeu Promotora de Vendas and Banco HSBC S.A , ,771 Application of funds 8,066,432 18,526,003 13,775,531 7,808,976 18,571,721 13,955,053 Interest on own capital 132, , , , , ,400 Income tax and social contribution on equity adjustment of stock exchange membership certificate Dividends paid 31,459 35,688-34,371 39,186 5,096 Market value adjustment - Securities and derivatives financial instruments , ,487 Variation in the minority interest of HSBC Leasing Arrendamento Mercantil (Brasil) S.A ,019 15,502 Investment in 1,733,920 2,663,422 1,238,878 1,735,008 2,626,025 1,312,996 Fixed assets 59,930 83, ,651 59,985 83, ,906 Lease properties 1,622,981 2,424, ,744 1,622,981 2,424, ,744 Investments ,575 35,368 1,145 51, ,185 Fixed assets not for own use 50,897 67,399 47,115 50,897 67,399 49,161 Acquisition of deferred assets 72, ,123 93,994 72, ,122 94,439 Increase in current and long-term assets 3,282,373 11,590,393 10,159,043 3,287,225 11,650,022 10,243,400 Interbank funds invested - - 2,188, ,188,839 Securities and derivative financial instruments - 1,243, ,676-1,268, ,343 Interbank and interbrach commitments 53, ,070 1,220,227 53, ,070 1,220,227 Loans 3,059,175 5,214,876 3,778,437 3,064,158 5,219,933 3,778,437 Lease operations Other receivables - 4,043,577 2,069,056-4,073,044 2,167,642 Other assets 169, , , , , ,811 Decrease in current and long-term assets 2,813,540 3,849,977 1,997,733 2,547,232 3,849,946 1,997,733 Interbank and interbranch accounts 679, , Money market repurchase commitments 1,412,694 3,849,977 20,892 1,412,671 3,849,946 20,892 Borrowings and repass - - 1,352, ,352,067 Derivative financial instruments 47, ,774 47, ,774 Other liabilities 674, , Increase/(decrease) in cash and cash equivalents (118,083) 199,541 (455,621) (118,083) 199,541 (455,621) Changes in financial position Beginning of the period / year 1,231, ,448 1,369,069 1,231, ,448 1,369,069 End of the period / year 1,112,989 1,112, ,448 1,112,989 1,112, ,448 Increase/(decrease) in cash and cash equivalents (118,083) 199,541 (455,621) (118,083) 199,541 (455,621) See the accompanying notes on the financial statements. 8

9 Year ended 31 December 2007 and Operations HSBC Bank Brasil S.A. - Banco Múltiplo ( HSBC Bank or Bank ), an indirect wholly-owned subsidiary of HSBC Holdings plc, incorporated in the United Kingdom, received authorisation from the Brazilian Central Bank ( BACEN ) to operate as a multiple service bank under applicable Brazilian law ( banco múltiplo ) with commercial lines covering investments, real estate financing, leasing, consumer credit, finance and investment, trade finance, credit card and investment fund management. Through its subsidiaries, it also operates in insurance, retirement benefit plans, savings plans, brokerage of foreign exchange and securities, securities dealing and asset management. The main corporate event that ocurred during last year in HSBC Bank was the following: As approved by the Extraordinary General Meeting held on 31 January 2006, the shareholders equity of Valeu Promotora de Vendas Ltda. and Credimatone S.A. were fully incorporated by HSBC Bank. The net equity were appraised by an independent certified accountant, based on book values, at 31 January 2006, to the amount of R$ 11,771 and R$ (317), respectively. The objective of the mergers was to rationalise the administrative and operational processes. 2 Presentation of the individual and combined financial statements The financial statements for HSBC Bank and HSBC Financial Conglomerate were prepared in accordance with accounting practices adopted in Brazil and rules and the instructions of the Brazilian Central Bank. 9

10 The combined financial statements ( HSBC Financial Conglomerate ) refer to the Financial Conglomerate and include HSBC Bank, its direct and indirect subsidiaries listed below and the overseas branch, located in Grand Cayman, which prepared balance sheets on the same date, observing the same accounting practices adopted by HSBC Bank: Ownership % Ownership % Companies Direct Indirect Direct Indirect HSBC Investment Bank Brasil S.A. - Banco de Investimento HSBC Corretora de Títulos e Valores Mobiliários S.A HSBC Leasing Arrendamento Mercantil (Brasil) S.A A reconciliation of shareholders equity as of 31 December 2007 and 2006 and net income for the years then ended of HSBC Bank and HSBC Financial Conglomerate is presented below: Shareholders equity Net income for the year Shareholders equity Net income for the year HSBC Bank 5,020,021 1,234,054 4,029, ,189 HSBC Leasing Arrendamento Mercantil (Brasil) S.A. 64,083 4,890 82,423 7,150 Other minority interests HSBC Financial Conglomerate 5,084,212 1,239,318 4,111, ,749 The balance sheet and statements of income accounts from transactions among the combined companies are eliminated. HSBC Bank has a branch in Grand Cayman. These financial statements include the branch abroad, whose total assets, shareholders equity and net income for the year amounted to R$ 1,735,577, R$ 54,501 and R$ 2,581, respectively (R$ 1,319,947, R$ 60,499 and R$ 15,452 respectively in 2006) 3 Description of significant accounting policies a. Income statement Income and expenses are recognised on the accrual basis. 10

11 b. Accounting estimates Accounting estimates are established based on objective and subjective factors, based on management s opinion of the appropriate amount to be recorded in the financial statements. Significant items subject to these estimates and assumptions include the residual value of fixed assets and deferred charges, goodwill, provision for loan losses, deferred tax assets, provision for contingencies, valuation of securities and derivative financial instruments market value, and assets and liabilities related to employees benefits. The settlement of transactions involving these estimates may result in different amounts due to the estimation inherent in the process of their determination. The Companies within the HSBC Financial Conglomerate review the estimates and assumptions at least semiannualy. c. Interbank funds invested Securities purchased under resale agreements performed under unrestricted trading contracts are adjusted according to the market value. Other transactions are recorded at the acquisition cost plus the return obtained up to the balance sheet date, net of the provision for devaluation, when applicable. d. Securities and derivative financial instruments As required by the Brazilian Central Bank Circular nº. 3,068, issued on 8 November 2001, securities are classified into the following categories: d.1 Trading securities - Securities acquired mainly for the purpose of selling them in the near term. These securities are reported at market value, recorded in the statements of income for the year; d.2 Securities available for sale - Securities not included in the other categories are carried at their market values. Adjustments of these instruments to market values, net of tax effects, are booked to an account in shareholders equity; and d.3 Securities held to maturity - Securities for which the Bank has the intention and financial capability to retain until their respective maturity dates. These investments are stated at cost, plus accrued interest to the balance sheet date. Interest is recorded in the statements of income in the respective years. 11

12 As required by BACEN Circular nº. 3,082, issued on 30 January 2002, the derivatives financial instruments were stated at their market values and changes in their reported values in the statement of income, taking into consideration the specific accounting treatment to be applied to hedging transactions. e. Loans, time deposits, interbank deposits, savings accounts and other assets and liabilities Transactions subject to predetermined remuneration rates are recorded at redemption value, adjusted to present value in deferred income/expense, respectively. Transactions subject to floating rates are recorded at cost plus interest accrued to the balance sheet date. The up dates for loans overdue until the 59th day are recorded as income, and as from the 60th day as suspended interest, and only recognized to results when the installments are actually received. f. Leasing operations Leasing operations are recorded at the value of amounts receivable, restated according to the conditions established in the lease agreements. Unearned lease income relates to contractual installments and the related income is earned on the due date of each installment, in accordance with applicable regulations (Administrative Rule MF nº. 140/84). Any loss at the end of the contract, arising from lessee exercising his right to buy, is deferred and amortised (for accounting and tax purposes) over the remaining useful life of the asset leased. 12

13 The financial adjustment to the lease portfolio, which is required for the net income and shareholders equity for the year, was calculated in accordance with accounting practices adopted in Brazil, following the BACEN criteria, based on the present value of future receivables, using the interest rate established on the contract. This procedure resulted in an accumulated depreciation surplus at HSBC Bank and HSBC Financial Conglomerate of R$ 372,270 (R$ 46,376 in 2006). Had the leasing operations been presented in the lease receivables and income from lease operations captions at present value, the balances as of 31 December 2007 and 2006 would have been presented as follows: HSBC Bank and HSBC Financial Conglomerate Balance sheet amount Reclassified amount Reclassified amount Reclassifications Lease receivables Current assets (*) 26, , , ,922 Long-term assets - 1,578,044 1,578, ,438 Leased assets 3,081,702 (3,080,783) 919 4,151 Other liabilities - Other Liability for residual value on leases Current liabilities (72,597) 72, Long-term liabilities (767,975) 767, Income from lease operations 925,764 (657,530) 268, ,533 Expenses on lease operations (657,530) 657, (*) Includes, R$ 13,791 related to advances paid to supliers, and its not part of the lease portfolio, as shown in the note 6.a. 13

14 g. Provision for loan losses The provision for loan losses was constituted in an amount compatible with the client and credit risk evaluation, in accordance with CMN Resolution 2,682/99. For loan contracts contracted with clients for which responsibility is less than R$ 50, the internal evaluation model is adopted, as provided under CMN Resolution 2,697/00. h. Investments Investments in subsidiaries are accounted for using the equity method. Other investments are recorded at cost, and adjusted, when applicable, by a provision for losses. Goodwill balances originated from acquisitions are supported by appraisal reports issued by independent experts and they are based on the businesses future profitability and added fair value of the assets. The goodwill amortisation is booked based on the businesses future profitability, which is reviewed yearly and does not exceed a ten year period. The amortisation period arising from fair value adjustments is booked based on the useful life of the respective assets. i. Fixed assets and deferred charges The property and equipment assets and deferred expenses are stated at cost net of depreciation, amortisation and provision for losses at HSBC Bank in the amount of R$ 749 (R$ 749 in 2006) and at HSBC Financial Conglomerate in the amount of R$ 784 (R$ 784 in 2006). Depreciation was calculated using the straight-line method, applying the following annual rates, which take into account the estimated useful lives of the assets: real estate in use (buildings) - 4%; equipment and communications and security systems - 10%; and transport and data processing systems - 20%. Leasehold improvements are amortised in accordance with the lease term, added for an equal term of renewal. Technology development costs are amortised over five years. 14

15 j. Leased assets Depreciation of leased assets was substantially calculated at annual rates equivalent to 70% of the estimated useful lives of the assets, in accordance with regulation 113 from 26 February 1998 of Ministry of Economy (except for assets leased to individuals, which are depreciated over the useful lives of the fixed assets), which are: five years for vehicles and similar and ten years for machinery, equipment, furniture and fixtures. k. Income and social contribution taxes The provision for income tax was calculated using a rate of 15% of taxable income, plus an additional 10%. The provision for social contribution tax was calculated using a rate of 9% of income before tax, adjusted according to current legislation. Deferred tax assets related to timing differences for income and social contribution taxes are included in Other receivables - Other and Other liabilities - Taxes and social security payable and reflected in the net income for the year, or when applicable in the shareholders equity. The deferred tax assets related to timing differences were adjusted by a valuation allowance, when applicable considering the likelihood of realisation in the foreseeable future, not in excess of that permitted by legislation in force. l. Foreign currency balances Foreign currency balances are recorded at rates ruling at the balance sheet date. m. Credit card administration Annual fees charged to cardholders are deferred when billed and taken to income over the life of the service provided. Discounts on payments to establishments participating in the credit card networks were recognised on the date that the purchases of cardholders are validated. n. Deferred income Includes non-refundable revenues received in advance. 15

16 4 Interbank funds invested The summary of the account balances as of 31 December 2007 and 2006 is as follow: HSBC Bank Within 3 months From 3 months to 1 year Above 1 year Total 2007 Total 2006 Money market 4,858, ,269-5,008,155 7,690,845 Backed position 3,586,155 88,036-3,674,191 2,222,999 Financed position 1,272,731 61,233-1,333,964 5,167,787 Clearing houses ,059 Interbank placements 803, , ,817 1,604,029 1,284,902 Interbank placements 803, , ,817 1,607,091 1,287,648 Valuation allowance - (3,062) - (3,062) (2,746) Foreign currency investment 480, , ,672 1,044, ,880 Total 6,143, , ,489 7,656,968 9,184,627 Current 7,139,479 9,099,314 Long-term 517,489 85,313 HSBC Finance Conglomerate Within 3 months From 3 months to 1 year Above 1 year Total 2007 Total 2006 Money market 4,858, ,269-5,008,155 7,690,845 Backed position 3,586,155 88,036-3,674,191 2,222,999 Financed position 1,272,731 61,233-1,333,964 5,167,787 Clearing houses ,059 Interbank placements 803, , ,817 1,604,029 1,284,653 Interbank placements 803, , ,817 1,607,091 1,287,399 Valuation allowance - (3,062) - (3,062) (2,746) Foreign currency investment 480, , ,672 1,044, ,880 Total 6,143, , ,489 7,656,968 9,184,378 Current 7,139,479 9,099,065 Long-term 517,489 85,313 16

17 5 Securities and derivative financial instruments The summary of the account balances as of 31 December 2007 and 2006 is as follows: HSBC Bank HSBC Financial Conglomerate Current Long-term Current Long-term Trading 1,983,541 4,227, ,983,541 4,227, Available for sale 5,258,059 51,094 4,221,290 6,815,660 5,283,342 54,640 4,239,463 6,828,710 Held to maturity 734, ,807 24,142 48, , ,100 24,678 50,478 Derivatives 382, , ,672 64, , , ,672 64,894 Sub-total 8,359,005 4,960,444 4,774,104 6,929,093 8,385,358 4,965,283 4,792,813 6,944,082 Futures 82,717 36, ,717 36, Total 8,441,722 4,997,194 4,774,104 6,929,093 8,468,075 5,002,033 4,792,813 6,944,082 a. Securities a.1 Trading The securities presented bellow are stated by their original due dates, in accordance with BACEN circular letter number 3,068, issued on 8 November HSBC Bank and HSBC Financial Conglomerate Securities Within 3 months From 3 months to 1 year From 1 to 3 years From 3 to 5 years From 5 to 15 years Above 15 years Market value Cost Income (expenses) Market value Income (expenses) Federal Treasury Bills 214, , , ,086,005 1,087,436 (1,431) 1,866,359 4,551 Nacional Treasury Bills ,463 1,465 (2) 373,281 1,091 National Treasury Notes 3,776 52, , , ,072 5, , ,086 (26,461) 1,925,898 26,851 Promissory Notes , ,065 20,745 (680) 62,025 (1) Debentures , ,383 38,983 (1,600) - - Total 217, , , , ,067 5,933 1,983,541 2,013,715 (30,174) 4,227,563 32,492 17

18 (In thousando of Reais) a.2 Available for sale a HSBC Bank From 3 From From From Effect on Effect on On Within 3 months 1 to 3 3 to 5 5 to 15 Market shareholders Market shareholders Securities demand months to 1 year years years years value Cost equity value equity National Treasury Bills - 1,221,082 1,010, ,492-1,658 2,411,719 2,406,978 4,741 2,135,986 9,875 Federal Treasury Bills - 169,929 2,374, ,544,515 2,501,035 43,480 2,373,544 97,080 Shares of Serasa (*) 43, , , National Treasury Notes ,443 1,466,522 1,449, ,265 3,914,427 3,948,757 (34,330) 1,849, ,179 Mortgage notes (15) 3, Global bonds , , , ,105 15, ,660 11,469 Debentures ,498 41,858 20,807 74, , ,157 (104) 190,235 (331) Promissory notes , ,878 75,396 (518) - - Total 43,886 1,391,087 3,823,086 1,687,184 1,563, ,973 9,479,349 9,407,500 71,849 6,866, ,375 Current 5,258,059 51,094 Long-term 4,221,290 6,815,660 Tax effects (26,169) (88,382) Net effect on shareholders equity 45, ,993 Net effect on equity in subsidiaries market value adjustment 6,444 2,511 Total 52, ,504 a HSBC Conglomerado Financeiro From 3 From From From Effect on Effect on On Within 3 months 1 to 3 3 to 5 5 to 15 Market shareholders Market shareholders Securities demand months to 1 year years years years value Cost equity value equity National Treasury Bills - 1,226,140 1,021, ,664-7,659 2,446,449 2,441,711 4,738 2,152,582 9,887 Federal Treasury Bills - 174,027 2,374, ,548,613 2,505,133 43,480 2,373,544 97,080 Shares of Serasa (*) 48, , , National Treasury Notes ,443 1,466,522 1,449, ,265 3,914,427 3,948,757 (34,330) 1,849, ,179 Mortgage notes (15) 3, Global bonds , , , ,105 15, ,660 11,469 Debentures ,498 41,858 20,807 74, , ,157 (104) 190,235 (331) Promissory notes , ,878 75,396 (518) - - Total 48,514 1,400,243 3,834,585 1,699,356 1,563, ,974 9,522,805 9,446,502 76,303 6,883, ,387 Current 5,283,342 54,640 Long-term 4,239,463 6,828,710 Tax effects (27,820) (88,387) Net effect on shareholders equity 48, ,000 Net effect on equity in subsidiaries market value adjustment 3,641 2,504 Total 52, ,504 (*) The balance refers to the book value after the remaining shares in Serasa S.A. had been marked to market. As of 31 December 2006 the cost value was classified in the permanent assets - Other Investments. 18

19 (In thousando of Reais) a.3 Held to maturity a HSBC Bank From 3 From From From Within 3 months 1 to 3 3 to 5 5 to 15 Market Securities months to 1 year years years years Cost value Cost National Treasury Bills - 8, ,512 8,513 - National Treasury Notes 6,462 14,805 16,091 5,906 2,145 45,409 50,108 87,955 Fixed Rate Notes (*) - 704, , , ,391 Total 6, ,140 16,091 5,906 2, , , ,346 Current 734, ,807 Long-term 24,142 48,539 a HSBC Conglomerado Financeiro From 3 From From From Within 3 months 1 to 3 3 to 5 5 to 15 Market Securities months to 1 year years years years Cost value Cost National Treasury Bills - 8, ,512 8,513 - National Treasury Notes 6,462 15,875 16,627 5,906 2,145 47,015 51,717 91,187 Fixed Rate Notes (*) - 704, , , ,391 Total 6, ,210 16,627 5,906 2, , , ,578 Current 735, ,100 Long-term 24,678 50,478 (*) Fixed Rate Notes issued by Korea Development Bank - KDB in the amount of USD 400 million, with interest rate of 9.98% p.a. and maturity on 18 December The market value of the securities is ascertained using the quoted market price available on the balance sheet date. If no market price quote is available, the amounts are estimated based on the quotes of dealers, price definition models, quote models or price quotes for instruments with similar characteristics. 19

20 b. Derivative financial instruments HSBC Bank carries out operations involving financial instruments to meet its own needs and those of its customers, in order to reduce exposure to market, currency and interest rate risks. Management of the risks involved in these operations is achieved by establishing operational policies, the determination of limits by the financial committee of the companies within the HSBC Financial Conglomerate and constant monitoring of the positions taken. The market value of the derivatives was calculated based on the average rates published by the Commodities & Futures Exchange - BM&F. Derivative financial instruments designated as hedge HSBC Bank s management practice is to identify the exposure to risks from variations in interest rates and exchange rates for assets and liabilities (objects of hedge) and to use derivative instruments to minimise the impact of these variations. The main transactions and future commitments that are the object of cash flow hedges are concentrated mainly on asset and liability operations indexed to floating rates (CDI). As determined in rules and regulations issued by the Central Bank of Brazil, the variances in market rates for derivative instruments are classified to a specific shareholders equity account. 20

21 Derivative financial instruments portfolio as of 31 December 2007 and 2006 was presented as follows: HSBC Bank and HSBC Financial Conglomerate Assets Liabilities Current Longterm Total Total Current Longterm Total Total Swap 240, , , , , , , ,138 Options 132,503 44, ,749 80,648 99,324 37, ,553 94,515 Forward contracts 9,489-9,489-9,477-9,477 - Sub-total 382, , , , , , , ,653 Futures 82,717-82,717 36, , ,154 37,511 Total 465, , , , , , , ,164 Current 241, ,178 Long term 64,894 79,986 The guarantees of the derivative financial instruments transactions are comprised of securities (Brazilian Government), amounting to R$ 1,336,386 (R$ 1,149,842 in 2006). 21

22 The detailed derivative financial instrument position and off balance sheet balances, including the hedge, were presented as follows: HSBC Bank and HSBC Financial Conglomerate Assets / (liabilities) Market value Off balance sheet Within 3 months From 3 months to 1 year Above 1 year Market value Effect on profit and loss Effect on shareholders' equity Market value b.1 Swaps Assets Interbank rate x foreign currencies 2,672,636 39,764 33, , ,179 (4,222) (2,118) 57,992 Interbank rate x pre fixed 371, ,825 46,825 45, Interbank rate x other rates 404, (2,803) - 5,958 Foreign currencies x pre fixed 2,041,749 3,626 22,141 4,902 30,669 32,755-1,289 Foreign currencies x interbank rates 230, ,033 1,350 3,465 2,805-5,419 Pre fixed x interbank rate 6, ,211 Pre fixed x foreign currencies 3,595,664 33,677 45, , ,912 (93,283) (503) 60,946 Other rates x interbank rates 155, ,447 6,114 7,714 5,783 5,540 - Other contracts 1,708,501 3,780 55,319 36,213 95,312 17,686-33,411 Total 11,187,315 81, , , ,237 5,125 3, ,226 Liabilities Interbank rate x foreign currencies 2,647,632 (1,170) (15,070) (119,838) (136,078) (39,136) - (42,564) Interbank rate x pre fixed 347,508 - (632) (2,156) (2,788) (3,119) - - Interbank rate x other rates 30,000 - (84) - (84) (35) - (3,267) Foreign currencies x pre fixed 659,963 (3,234) (2,225) (1,308) (6,767) (6,235) - (862) Foreign currencies x interbank rate 222,672 (141) (1,979) (1,167) (3,287) (11,870) - (43) Pre fixed x interbank rate 200,000 - (345) - (345) (299) - (8,266) Pre fixed x foreign currencies 5,232,824 (89,864) (170,902) (132,201) (392,967) 79,954 - (114,882) Other rates x interbank rates 2,809,814 (5,399) (70,076) (64,170) (139,645) 37,733 (16,801) (19,254) Total 12,150,413 (99,808) (261,313) (320,840) (681,961) 56,993 (16,801) (189,138) Total (13,554) Tax effects 4,632 Net effect on shareholders' equity (8,922) b.2 Foreign currency options Assets Commitments to buy 3,662,170 20,906 47,349 40, ,651 (14,443) - 37,970 Commitments to sell 1,646,621 37,173 27,075 3,850 68,098 39,042-33,918 Total 5,308,791 58,079 74,424 44, ,749 24,599-71,888 Liabilities Commitments to buy 3,721,518 (8,809) (46,189) (34,749) (89,747) 22,457 - (40,098) Commitments to sell 1,644,657 (19,928) (24,398) (2,480) (46,806) (17,096) - (33,398) Total 5,366,175 (28,737) (70,587) (37,229) (136,553) 5,361 - (73,496) b.3 Shares options Assets Commitments to buy ,755 Commitments to sell Total ,760 Liabilities Commitments to buy (21,008) Commitments to sell (11) Total (21,019) b.4 Forwards of securities Assets Commitments to buy - 3, , Commitments to sell - 6, , Total - 9, , Liabilities Commitments to buy - (3,234) - - (3,234) Commitments to sell - (6,243) - - (6,243) Total - (9,477) - - (9,477) b.5 Futures (*) Assets Foreign exchange 5,181,318 80, ,591 50,303 1,125 35,011 Interbank rate 5,344,300 2, ,126 2,458 (11,114) 1,739 Total 10,525,618 82, ,717 52,761 (9,989) 36,750 Liabilities Foreign exchange 8,672,993 (117,066) - - (117,066) (74,237) (371) (28,870) Interbank rate 23,237,100 (7,088) - - (7,088) (8,976) 28,589 (8,641) Total 31,910,093 (124,154) - - (124,154) (83,213) 28,218 (37,511) Total 18,229 Tax effects (6,879) Net effect on shareholders' equity 11,350 (*) Recorded under Other receivables - Securities clearing accounts and Other liabilities - Due in connection with securities transactions. 22

23 The detailed derivative financial instruments position designated as hedges and off balance sheet balances were presented as follows: HSBC Bank and HSBC Financial Conglomerate Assets/ (liabilities) Market value Off balance sheet Within 3 months From 3 months to 1 year Above 1 year Market value Effect on shareholders' equity Market value b.6 Cashflow hedge b.6.1 Swaps Assets Interbank rate x foreign currencies 291,458 25,316 8,612 5,958 39,886 (2,118) 2,642 Interbank rate x other rates (440) Pre fixed x interbank rate 256, Pre fixed x foreign currencies 62, ,280-2,101 (503) 526 Other rates (*) x interbank rate 100, ,114 6,114 5,540 3,518 Total 711,219 26,137 9,892 12,072 48,101 3,247 7,164 Liabilities Foreign currencies x Libor (3,458) Others rates (*) x interbank rate 384,260 (1,638) - - (1,638) (16,801) (232) Total 384,260 (1,638) - - (1,638) (16,801) (3,690) Total Tax effects 4,632 Effect on shareholders' equity (8,922) (13,554) 3,474 b.6.2 Futures (**) Assets Foreign currencies 246,831 2, ,103 1,125 4,323 Interbank rates 12,495, (11,114) 6,449 Total 12,741,831 2, ,327 (9,989) 10,772 Liabilities Foreign currencies (190,415) (1,879) - - (1,879) (371) (762) Interbank rates (14,617,000) (6,706) - - (6,706) 28,589 (11,474) Total (14,807,415) (8,585) - - (8,585) 28,218 (12,236) Total 18,229 (1,464) Tax effects (6,879) Effect on shareholders' equity 11,350 (*) Other rates are comprised of inflation rate (IGPM), pre fixed and US dollar. (**) Recorded under Other receivables - Securities clearing accounts and Other liabilities - Due in connection with securities transactions. 23