HSBC Bank Brasil S.A. - Banco Múltiplo

Transcription

1 Financial statements 30 June 2010 and 2009 (A 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 Half-year ended 30 June 2010 and 2009 (in thousands of reais) Contents Independent auditors report 3-4 Balance sheets 5 Statements of income 6 Statements of changes in shareholders equity 7 Statements of cash flows 8 Statements of value added

3 ABCD KPMG Auditores Independentes Al. Dr. Carlos de Carvalho, º Curitiba, PR - Brazil P.O Box Curitiba, PR - Brazil 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 30 June 2010 and 2009 and the related statements of income, changes in shareholders equity, cash flows and added value for the half-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 requirements of the Brazilian Central Bank, which determine that the leasing portfolio should be registered at its present value by recording an adjusting provision for the surplus or shortage of depreciation, classified as permanent assets, as mentioned in Note 3(g). These requirements do not require the reclassification of the operations, which remain registered in accordance with the requirements of Law n 6,099/74 in various accounts in current and long-term assets, lease income and lease expenses. The resulting presentation of the net income for the half-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 30 June 2010 and 2009, and the results of its operations, changes in its shareholders equity, cash flows and added value for the half-years then ended, in conformity with accounting practices adopted in Brazil applicable to institutions authorised to operate by the Brazilian Central Bank. 3 KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative ( KPMG International ), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

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 30 June 2010 and 2009, and the corresponding combined statements of income, cash flows and added value for the half-years then ended. These financial statements 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. 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 30 June 2010 and 2009, and the combined results of its operations, the cash flows and the value added for the half-years then ended, in conformity with rules issued by the Brazilian Central Bank specifically applicable to the preparation of these combined financial statements. Curitiba, 06 August 2010 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 Rodrigo de Mattos Lia Accountant CRC 1SP252418/O-3 S-PR 4

5 Balance sheets 30 June 2010 and 2009 Notes HSBC HSBC HSBC Bank Financial Conglomerate Notes HSBC Bank Financial Conglomerate Assets Liabilities Current assets 79,048,144 72,514,623 79,504,734 72,568,305 Current liabilities 61,394,373 50,732,167 60,971,926 49,941,150 Cash and cash equivalents 1,693,036 1,069,643 1,693,036 1,069,643 Deposits 14.a 32,901,838 24,052,187 31,274,476 22,712,638 Interbank funds invested 4 16,025,295 20,791,896 15,499,061 20,592,952 Demand deposits 7,682,302 6,722,281 7,658,438 6,715,226 Savings deposits 3,312,712 2,620,833 3,312,712 2,620,833 Money market - reverse repurchase agreements 13,283,695 16,214,630 13,283,695 16,214,630 Interbank deposits 3,129,807 3,251,015 1,526,309 1,918,529 Interbank deposits 2,741,600 4,577,266 2,215,366 4,378,322 Time deposits 18,729,088 11,417,792 18,729,088 11,417,792 Other deposits 47,929 40,266 47,929 40,258 Securities and derivative financial instruments 5 7,914,987 5,799,323 8,553,044 5,818,174 Money market repurchase agreements 14 3,271,348 1,489,060 3,272,764 1,489,060 Freely held 5,545,587 2,885,665 6,164,943 2,934,331 Subject to repurchase commitments 9,407 44,237 3,795 - Own portfolio 276, , Derivative financial instruments 2,029,186 1,543,920 2,029,186 1,543,920 Third party portfolio 2,503, ,772 2,781,933 1,264,157 Deposited with the Brazilian Central Bank 108, , , ,096 Short trading positions 490, , , ,903 Deposited in guarantee of exchange operations 222, , , ,827 Acceptance and endorsements 14.b 1,360,385 1,058,213 1,360,385 1,058,213 Interbank accounts 15,459,664 3,442,804 15,459,664 3,442,804 Mortgage bonds 1,007, ,129 1,007, ,129 Collections in transit 703, , , ,762 Obligations for notes and bonds issued abroad 352, , , ,084 Term deposits Brazilian Central Bank deposits 14,742,442 2,764,966 14,742,442 2,764,966 Interbank accounts 767, , , ,054 National Housing System 11,025 7,710 11,025 7,710 Correspondents 2,414 2,366 2,414 2,366 Payments in transit 763, , , ,142 Correspondents 3,851 6,912 3,851 6,912 Interbranch accounts 324 1, ,888 Interbranch accounts 918, , , ,056 Third party funds in transit Own funds in transit 321 1, ,888 Third party funds in transit 918, , , ,704 Internal transfer of funds Loans 6 20,166,375 18,627,503 20,623,389 18,743,143 Borrowings 14.c 2,765,086 1,878,452 2,765,086 1,878,452 Loans 21,738,626 20,332,461 22,204,685 20,448,296 Public sector 1,809-1,809 - Domestic - Official institutions 2,056 2,035 2,056 2,035 Private sector 21,736,817 20,332,461 22,202,876 20,448,296 Foreign 2,763,030 1,876,417 2,763,030 1,876,417 Loan impairment charge provision 7 (1,572,251) (1,704,958) (1,581,296) (1,705,153) Repass borrowings from public sector - Official institutions 14.c 1,620, ,861 1,620, ,861 Lease operations 6 (33,479) (57,724) (33,479) (57,724) BNDES (Federal Development Bank) 494, , , ,096 Lease receivables - Private sector 983,574 1,039, ,574 1,039,971 FINAME (Federal Capital Goods Financing Agency) 1,126, ,765 1,126, ,765 Unearned lease income (958,105) (1,007,289) (958,105) (1,007,289) Provision for lease operations losses 7 (58,948) (90,406) (58,948) (90,406) Derivative financial instruments 5b 2,186, ,655 2,186, ,655 Other receivables 17,474,652 22,493,944 17,361,116 22,611,172 Other liabilities 15,601,977 19,614,629 16,805,476 20,163,161 Amounts due from honoured credit guarantees Collection of taxes 413, , , ,565 Foreign exchange portfolio 8 12,798,957 17,801,260 12,552,969 17,801,260 Foreign exchange portfolio 8 11,608,845 16,327,198 11,362,856 16,327,198 Service fees receivable 137, , , ,512 Corporate and statutory contribution 145, , , ,011 Securities clearing accounts 129,921 50, , ,344 Taxes and social security payable 9 229, , , ,027 Other 10 4,558,600 4,773,926 4,591,302 4,803,224 Securities clearing accounts 81,889 57,673 1,460, ,040 Provision for losses 7 (150,902) (261,373) (150,902) (261,373) Other 10 3,122,697 2,479,056 3,125,386 2,482,320 Other assets 347, , , ,253 48,510,391 50,726,584 48,354,174 50,667,111 Long-term liabilities Temporary investments 1,330 1,330 1,330 1,330 Deposits 14.a 39,206,452 42,329,607 38,756,731 41,977,669 Other assets 127,393 57, ,118 58,434 Valuation allowance (12,079) (7,088) (12,079) (7,088) Interbank deposits 475, ,579 25, ,641 Prepaid expenses 21.d 230, , , ,577 Time deposits 38,731,438 41,530,028 38,731,438 41,530,028 Long-term assets 26,570,084 23,989,047 27,139,104 24,487,858 Acceptance and endorsements - Obligations for notes and bonds issued abroad 100, ,638 - Interbank funds invested - Interbank deposits 4 1,282, , , ,332 Securities and derivative financial instruments 5 11,093,169 9,612,442 11,202,481 9,692,598 Borrowings 14.b 310,226 50, ,226 50,713 Freely held 6,977,973 2,474,581 7,260,855 2,747,501 Domestic - Official institutions 14,390 16,466 14,390 16,466 Subject to repurchase commitments 271, , Foreign 295,836 34, ,836 34,247 Derivative financial instruments 358, , , ,656 Deposited with the Brazilian Central Bank 1,194,304 4,600,796 1,194,352 4,600,840 Repass borrowings from public sector - Official institutions 14.c 814, , , ,999 Deposited in guarantee of exchange operations 2,291,285 2,053,301 2,388,827 2,122,641 BNDES (Federal Development Bank) 212, , , ,925 Loans 6 10,666,870 9,784,697 11,444,767 10,161,510 FINAME (Federal Capital Goods Financing Agency) 601, , , ,074 Loans - Private sector 11,231,547 10,365,678 12,016,538 10,743,271 Derivative financial instruments 5.b 204, , , ,776 Loan impairment charge provision 7 (564,677) (580,981) (571,771) (581,761) Other liabilities 7,874,470 7,316,489 8,167,974 7,608,954 Lease operations (87,169) (80,323) (87,169) (80,323) Foreign exchange portfolio 8 641, , , ,156 Lease receivables - Private sector 1,445,928 1,802,452 1,445,928 1,802,452 Taxes and social security payable 9 974,097 1,202,695 1,241,908 1,472,300 Unearned lease income (1,445,928) (1,802,452) (1,445,928) (1,802,452) Subordinated debts 14.d 2,738,296 2,529,917 2,738,296 2,529,917 Provision for lease operations losses 7 (87,169) (80,323) (87,169) (80,323) Other 10 3,520,913 3,440,721 3,546,606 3,463,581 Other receivables 3,434,384 3,387,542 3,756,235 3,693,256 Foreign exchange portfolio 8 641, , , ,156 7,156,520 5,547,711 7,195,999 5,585,721 Amounts due from honoured credit guarantees - 1,158-1,158 Shareholders' equity Other 10 2,809,834 3,274,877 3,131,685 3,582,211 Capital 16 Provision for losses 7 (16,614) (31,649) (16,614) (33,269) Capital - Domestic ,453 33,453 Capital - Foreign 4,824,344 3,483,386 4,824,344 3,483,386 Other assets - Prepaid expenses 21.d 180, , , ,485 Capital reserve 8,671 8,775 8,679 8,781 Revaluation reserve 4,247 4,503 4,247 4,503 Permanent assets 11,443,056 10,502,792 9,878,261 9,137,819 Revenue reserve 2,355,416 2,199,857 2,361,434 2,204,408 Fair value adjustment - Securities and derivative financial instruments (36,158) (148,810) (36,158) (148,810) Investments 3.i 3,797,022 2,980,958 2,232,005 1,615,565 Subsidiaries 12 3,790,197 2,974,757 2,225,142 1,608,912 Domestic 3,790,197 2,974,757 2,225,142 1,608,912 Other investments 9,404 8,780 9,447 9,237 Provision for losses (2,579) (2,579) (2,584) (2,584) Fixed assets 3.j 506, , , ,460 Property for own use 96,045 93,352 96,045 93,352 Other fixed assets 973, , , ,882 Accumulated depreciation (563,044) (547,375) (563,401) (547,774) Leased assets 3.k 6,268,550 6,329,230 6,268,550 6,329,230 Leased assets 6,762,536 6,722,534 6,762,536 6,722,534 Accumulated depreciation (493,986) (393,304) (493,986) (393,304) Intangible 3.l 870, , , ,564 Intangible assets 1,717,238 1,279,727 1,718,205 1,280,693 Accumulated amortisation (846,573) (592,423) (847,420) (593,129) Total 117,061, ,006, ,522, ,193,982 Total 117,061, ,006, ,522, ,193,982 See the accompanying notes to the financial statements. 5

6 Statements of income Half-year ended 30 June 2010 and 2009 (In thousands of reais, except net income per thousand shares) Notes HSBC Bank HSBC Financial Conglomerate Income from financial operations 7,419,632 8,264,292 7,488,229 8,282,908 Loans 3,873,263 4,291,082 3,978,796 4,316,708 Lease operations 1,342,111 1,262,003 1,342,111 1,262,003 Securities 1,875,894 2,121,985 1,838,958 2,114,975 Derivative financial instruments (62,618) 408,245 (62,618) 408,245 Trade finance and foreign exchange 124, , , ,241 Compulsory loans 266,921 17, ,921 17,736 Expenses from financial operations (5,130,870) (6,157,795) (5,061,060) (6,074,016) Deposits, money market and interbank funds (2,994,532) (3,395,239) (2,913,664) (3,310,485) Borrowings and repass funding (80,453) (182,595) (80,453) (182,595) Lease operations (1,026,781) (951,784) (1,026,781) (951,784) Trade finance and foreign exchange Loan impairment charge provision 7 (1,029,104) (1,628,177) (1,040,162) (1,629,152) Net income from financial operations 2,288,762 2,106,497 2,427,169 2,208,892 Other operating expenses (1,582,889) (1,695,501) (1,645,783) (1,743,394) Service fee income , , , ,664 Receipts from banking charges 301, , , ,724 Personnel expenses (928,392) (898,657) (936,914) (906,147) Other administrative expenses 18 (1,710,811) (1,719,496) (1,716,487) (1,725,682) Transactional taxes (258,036) (282,494) (271,605) (293,412) Equity share in earnings of subsidiaries , , , ,403 Other income , , , ,509 Other expenses 19 (341,987) (415,685) (365,213) (422,454) Operating income 705, , , ,498 Non-operating income, net 21.b (41,204) 23,157 (40,259) 27,068 Income before income and social contribution taxes and profit sharing 664, , , ,566 Income and social contribution taxes 15 (97,812) (26,172) (168,919) (80,031) Current (36,018) (22,805) (112,334) (77,149) Deferred (61,794) (3,367) (56,585) (2,882) Profit sharing (143,578) (160,211) (147,966) (163,710) Net income for the half-year 423, , , ,825 Number of shares outstanding (thousands) 2,272,237 1,835,473 Net income per thousand shares - R$ See the accompanying notes to the financial statements. 6

7 Statements of changes in shareholders' equity (HSBC Bank) Half-year ended 30 June 2010 and 2009 Capital Revaluation Capital reserve reserve Revenue reserve Value adjustments Fair value adjustment - Capital in equity Securities and derivative financial Capital Assets in Retained investments instruments increase subsidiaries Legal Statutary earnings Total Balances as of 1 January ,824,344-8,671 4, ,125 1,941,687 (30,536) - 7,079,666 Values realized from revaluation reserve (128) Paid dividends (335,847) - - (335,847) Actuarial adjustment (4,956) (4,956) Fair value adjustments - Securities and derivative financial instruments Bank (6,152) - (6,152) Subsidiaries Net income for the half-year , ,279 Appropriations from net income Legal Reserves , ,287 - (418,451) - Balances as of 30 June ,824,344-8,671 4, ,289 2,003,127 (36,158) - 7,156,520 Changes for the half-year (128) 21,164 61,440 (5,622) - 76,854 Balances as of 1 January ,289,228-9,145 4, , ,011 (119,271) 2,565,253 5,923,536 Reversal of equity adjustments of stock exchange membership certificate - - (370) (370) Realisation of revaluation reserve (127) Capital increase - 1,194, (1,194,158) - Fair value adjustments - Securities and derivative financial instruments Bank (32,737) - (32,737) Subsidiaries ,198-3,198 Net income for the half-year , ,770 Appropriations from net income Legal Reserves ,488 1,012,818 - (1,025,306) - Proposed dividends (593,686) (593,686) Balances as of 30 June ,289,228 1,194,158 8,775 4, ,028 1,889,829 (148,810) - 5,547,711 Changes for the half-year - 1,194,158 (370) (127) 12,488 1,012,818 (29,539) (2,565,253) (375,825) See the accompanying notes to the financial statements 7

8 Statements of Cash Flows Notes HSBC Bank HSBC Financial Conglomerate Cash flow from operating activities Net income for the half-year 423, , , ,825 Adjustments to the net income 1,558,271 1,879,502 1,666,581 1,960,805 Allowance for doubtful debts 7 1,029,104 1,628,177 1,040,162 1,629,152 Provision for deferred income tax and social contribution 15.b 61,794 3,367 56,585 2,882 Depreciation and amortisation 160, , , ,234 Depreciation and amortisation of finance leases 821, , , ,554 Depreciation shortfall/excess (259,926) (522,884) (259,926) (522,884) Provision for devaluation of assets not for use 9,535 2,227 9,535 2,227 Equity in income of operations subsidaries and associated companies 12 (269,934) (238,946) (167,945) (158,403) Others 6,033 6,876 6,418 7,043 Adjusted net profit for the half-year (*) 1,981,550 2,127,272 2,090,823 2,209,630 Changes in assets and liabilities: (9,773,987) (2,587,025) (9,892,375) (2,723,790) (Increase) / decrease in interbank funds applied (1,373,254) (1,281,627) (1,112,207) (871,636) (Increase) / decrease in securities and derivative financial instruments (2,551,234) 2,548,790 (3,161,618) 2,534,986 (Increase) / decrease in interbank and interbranch accounts 177,286 (488,782) 177,286 (488,782) (Increase) / decrease in compulsory deposits with the Central Bank of Brazil (12,142,631) 60,761 (12,142,631) 60,761 (Increase) / decrease in loans (1,655,997) 2,166,060 (1,984,383) 1,679,728 Decrease in leasing operations 18,175 (6,207) 18,175 (6,207) (Increase) / decrease in other receivables (5,285,312) 3,023,966 (5,043,491) 2,931,838 (Increase) / decrease in other assets 142, , , ,079 (Increase) leased assets (450,356) (982,358) (450,356) (982,358) Increase / (decrease) in deposits 4,217,619 (628,882) 4,123,233 (701,012) Increase / (decrease) in money market repurchase commitments 1,208, ,220 1,210, ,223 Increase / (decrease) in funds from issue of securities 107,873 (185,377) 107,873 (185,377) Increase / (decrease) in borrowing and repasses 2,109,006 (3,740,888) 2,109,006 (3,740,888) Increase / (decrease) in derivative financial instruments 1,268,294 (1,490,338) 1,268,294 (1,490,338) Increase / (decrease) in other liabilities 5,933,668 (954,932) 6,347,523 (837,144) Write off of allowance for doubtful receivables 7 (1,486,873) (1,081,004) (1,489,705) (1,081,009) Fair value adjustment - securities available for sale (6,152) (32,737) (6,152) (32,654) Other (4,956) - (4,956) - Net cash generated by / (applied in) operational activities (7,792,437) (459,753) (7,801,552) (514,160) Cashflow from investment activities: Disposal of investments ,705 Disposal of fixed assets for own use Decrease in intangible assets 116,691 11, ,691 11,146 Purchase of investments (41,230) (618) (378) (21) Purchase of fixed assets for own use (38,098) (60,239) (38,098) (60,241) Investment in intangible assets (245,369) (107,013) (245,369) (107,020) Dividends received 74, Net cash generated by / (applied in) investment activities (133,156) (154,949) (166,312) (153,470) Cashflow from financing activities: Subordinated debt 119, , , ,125 Dividends proposed/paid (335,847) (593,686) (335,847) (593,686) Net cash generated by / (applied in) financing activities (215,980) (101,561) (215,980) (101,561) Increase / (decrease) in cash and cash equivalents (8,141,573) (716,263) (8,183,844) (769,191) Cash and cash equivalents 20 Start of half-year 20,626,625 17,842,930 20,526,193 17,842,930 End of half-year 12,485,052 17,126,667 12,342,349 17,073,739 Increase / (decrease) in cash and cash equivalents (8,141,573) (716,263) (8,183,844) 769,191 (*) The statement of cash flows is useful for users to evaluate the capacity of the entity to generate cash and cash equivlents. As a result, the accounting profit after tax is adjusted in accordance with CVM resolution n 3,604/08 to demonstrate the effective movement in cash balances. See the accompanying notes to the financial statements 8

9 Statements of value added HSBC Bank HSBC Financial Conglomerate 2010 % 2009 % 2010 % 2009 % COMPOSITION OF VALUE ADDED 1 - Income Financial operations 7,419,632 8,264,292 7,488,229 8,282,908 Service fee income 709, , , ,664 Receipts from banking charges 301, , , ,725 Allowance for doubtful receivables (1,029,104) (1,628,177) (1,040,162) (1,629,152) Others 375, , , ,577 Total 7,776,931 8,041,157 7,924,558 8,126, Financial operations expenses (4,101,766) (4,529,618) (4,020,898) (4,444,864) 3 - Supplies purchased from third parties Water, electricity and gas expenses (25,178) (24,141) (25,226) (24,186) Communications (136,201) (138,387) (136,371) (138,555) Materials (15,373) (17,861) (15,437) (17,912) Third party services (341,201) (431,478) (341,649) (431,830) Specialized technical services (148,971) (67,954) (150,535) (69,817) Others (1,167,652) (1,220,446) (1,193,127) (1,230,701) Total (1,834,576) (1,900,267) (1,862,345) (1,913,001) 4 - GROSS VALUE ADDED ( ) 1,840,589 1,611,272 2,041,315 1,768, Depreciation and amortisation (160,187) (142,131) (160,274) (142,234) 6 - NET VALUE ADDED PRODUCED BY THE ENTITY (4 + 5) 1,680,402 1,469,141 1,881,041 1,626, VALUE ADDED RECEIVED IN TRANSFER Equity share in earnings of subsidiaries 269, , , , TOTAL VALUE ADDED TO DISTRIBUTE (6 + 7) 1,950,336 1,708,087 2,048,986 1,785,026 DISTRIBUTION OF VALUE ADDED Employment remuneration 937, , , , Direct remuneration 739, , , , Benefits 154, , , , Government severance indemnity fund of employees (FGTS 39, , , , Other charges 4, , , , Taxes and contributions 490, , , , Federal 434, , , , State 2, , , Municipal 53, , , , Remuneration of third party capital 99, , , , Rents 99, , , , Retained profits 423, , , , Total 1,950, ,708, ,048, ,785, See the accompanying notes to the financial statements 9

10 (in thousands of reais) 1 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 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. 2 Presentation of the individual and combined financial statements The financial statements of HSBC Bank were prepared in accordance with accounting practices derived from corporate legislation and the norms and instructions issued by the National Monetary Council ( CMN ) and the Central Bank of Brazil ( BACEN ). The financial statements of the HSBC Financial Conglomerate were prepared adopting, when applicable, consolidation criteria in accordance with the Accounting Chart for Institutions from the National Financial System - COSIF, introduced by Circular 1,273 of 29 December On 28 December 2007, Law 11,638/07 was enacted, which altered Corporation Law, regarding the accounting practices adopted in Brazil. Although the aforementioned law had come into force, some of the changes that were introduced depend on the issue of further regulations by the National Monetary Council and by BACEN. The alterations that have been approved by BACEN, are as follows: 1) the accounting treatment of intangible assets, through CMN Resolution 3,642/08; 2) the procedures for measuring the recoverable value of assets, through CMN Resolution 3,566/08; 3) preparation of the statement of cash flows which replaces the statement of changes in financial position, through CMN Resolution 3,604/08, and 4) Additionally, BACEN approved CMN resolution 3,750/09 which relates to the disclosure of information about related parties and CMN resolution 3,823/09 and circular 3,428/10 which contain disclosure and measurement requirements for contingent assets, liabilities and legal obligations. According to the evaluation performed by the Bank s management, only items 1, 3 and 4 affect the preparation/presentation of the financial statements. In addition, the norms and instructions from the Securities Commission ( CVM ) and from the Accounting Pronouncements Committee ( CPC ), were observed for the subsidiary HSBC Leasing Arrendamento Mercantil (Brasil) S.A., when applicable. 10

11 a. To aid comparability with the financial statements of 30 June 2010, the following adjustments were made to the balances of 30 June 2009 to recognise provisions for the legal obligations relating PIS and Summer Plan inflation rates being disputed in the courts. a.1 Balance Sheet HSBC Bank 30/06/2009 HSBC Financial Conglomerate Assets Previous value Adjustments Adjusted value Previous value Adjustments Adjusted value Long-term assets 23,970,569 18,478 23,989,047 24,439,154 48,704 24,487,858 Other receivables 3,369,064 18,478 3,387,542 3,644,552 48,704 3,693,256 Other 3,256,399 18,478 3,274,877 3,533,507 48,704 3,582,211 Permanent assets 10,562,647 (59,855) 10,502,792 9,137,819-9,137,819 Investments 3,040,813 (59,855) 2,980,958 1,615,565-1,615,565 Domestic subsidiaries 3,034,612 (59,855) 2,974,757 1,608,912-1,608,912 Total 107,047,839 (41,377) 107,006, ,145,278 48, ,193,982 Liabilities Long-term liabilities 50,680,389 46,195 50,726,584 50,530, ,285 50,667,111 Other liabilities 7,270,294 46,195 7,316,489 7,472, ,285 7,608,954 Taxes and social securitiy payable 1,156,500 46,195 1,202,695 1,336, ,285 1,472,300 Shareholders' equity 5,635,283 (87,572) 5,547,711 5,673,302 (87,581) 5,585,721 Revenue reserve 2,287,429 (87,572) 2,199,857 2,291,989 (87,581) 2,204,408 Total 107,047,839 (41,377) 107,006, ,145,278 48, ,193,982 a.2 Statements of income HSBC Bank 30/06/2009 HSBC Financial Conglomerate Previous value Adjustments Adjusted value Previous value Adjustments Adjusted value Other operating expenses (1,693,130) (2,371) (1,695,501) (1,740,075) (3,319) (1,743,394) Equity share in earnings of subsidiaries 240,367 (1,421) 238, , ,403 Other administrative expense (414,735) (950) (415,685) (419,135) (3,319) (422,454) Operating income 413,367 (2,371) 410, ,817 (3,319) 465,498 Income before income and social contribution taxes and profit share 436,524 (2,371) 434, ,885 (3,319) 492,566 Income and social contribution taxes (26,552) 380 (26,172) (81,358) 1,327 (80,031) Deferred (3,747) 380 (3,367) (4,209) 1,327 (2,882) Net income for the half-year 249,761 (1,991) 247, ,817 (1,992) 248,825 b. During the half-year, HSBC Bank and its subsidiaries recognised the following provisions as a result of the guidance in Circular 3,429 issued by the Central Bank of Brasil on 11 February 2010: 30/06/2010 HSBC Financial HSBC Bank Conglomerate Provision for contingencies of PIS e , ,211 Provisions for contingencies from summer plan inflation adjustments ,525 Total provision for contingencies 47, ,736 Deferred tax asset (IR/CS) on additional provisions (19,106) (50,884) Balance after tax 28,659 90,852 Adjustment in equity 28,178 89,187 Adjustment in statement of income for the half-year ended 30 June ,665 The above adjustments are recognised in accordance with Circular 2.682/96 of the Central Bank of Brasil. Refer to note 21.h for more information. 11

12 (in thousands of reais) c. 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 Finance (Brasil) S.A. Banco Múltiplo HSBC Corretora de Títulos e Valores Mobiliários S.A HSBC Leasing Arrendamento Mercantil (Brasil) S.A A reconciliation of shareholders equity as of 30 June 2010 and 2009 and net income for the halfyears then ended of HSBC Bank and HSBC Financial Conglomerate is presented below: Shareholders equity Net income for the half-year Shareholders equity Net income for the half-year HSBC Bank 7,156, ,279 5,547, ,770 HSBC Leasing Arrendamento Mercantil (Brasil) S.A. 39, ,832 1,040 Other minority interests HSBC Financial Conglomerate 7,195, ,242 5,585, ,825 The amount recognised in the balance sheet and the statements of income accounts from transaction 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 half-year including adjustments for foreign exchange variation, amounted to R$ 3,235,616, R$ 487,138 and R$ (70,372), respectively (R$ 2,485,882, R$ 403,555 and R$ 62,747, respectively, in 2009). 12

13 (in thousands of reais) 3 Description of significant accounting policies a. Recognition of results Income and expenses are recognised on an accruals basis. 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, goodwill, provision for loan losses, deferred tax assets, provision for contingencies, valuation of securities and the fair value of derivative financial instruments and assets and liabilities related to employees benefits. The settlement of transactions involving these estimates may result in different amounts being realized due to the estimation inherent in their determination. The companies within the HSBC Financial Conglomerate review the estimates and assumptions at least semi-annually. c. Cash and cash equivalents Refers to cash in local and foreign currencies, money market transactions (reverse repurchase agreements collateralized with securities owned by the counterparty) and interbank deposits, with a maturity at the balance sheet date equal to or less than 90 days, and with an insignificant risk of changes in value. d. Interbank funds invested Securities sold short through stock lending activities are adjusted according to the market value of the underlying instrument. 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. e. 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: 13

14 (in thousands of reais) e.1 Trading securities - Securities acquired under a strategy of active and frequent trading. These securities are reported at market value with changes in this value recorded in the statements of income for the period; e. 2 Securities available for sale - Securities that do not qualify for inclusion in the other categories are carried at their market values. Adjustments of these instruments to market values, net of income tax, are booked to an account in shareholders equity; or e.3 Securities held to maturity - Securities for which the Bank has the intention and financial capacity to retain until their maturity. These investments are stated at cost, plus accrued interest to the balance sheet date. Interest is recorded in the statements of income. As required by BACEN Circular nº. 3,082, issued on 30 January 2002, derivative financial instruments are stated at their market values and changes in their reported values are recognised in the statement of income, with an exception for cash flow hedging transactions which have a specific accounting treatment. f. Loans, leasing operations, securities and loans receivable, others receivables, 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. Interest is accrued in the income statement on loans overdue until the 59 th day. As from the 60 th day interest is accrued as suspended interest, and only, transferred to the income statement when the instalments are actually received. g. Leasing operations Leasing operations are recorded at the value of amounts receivable, plus interest and other adjustments according to the conditions established in the lease agreements. Unearned lease income refers to the contractual installments due. Therelated income is recognised in the income statement on the due date of each installment, in accordance with applicable regulations (Administrative Rule MF nº. 140/84). 14

15 (in thousands of reais) Any loss at the end of the contract, arising due to the lessee exercising the option to buy the leased item, is deferred and amortised (for accounting and tax purposes) over the remaining useful life of the asset leased. The financial adjustment to the lease portfolio, which is required for the net income and shareholders equity for the period to be in accordance with accounting practices adopted in Brazil, was calculated in accordance with 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$ 2,533,579 (R$ 1,853,873 in 2009). Had the leasing operations been presented in the lease receivables and income from lease operations captions at present value, the balances as of 30 June 2010 and 2009 would have been presented as follows: Balance sheet amount HSBC Bank and HSBC Financial Conglomerate Reclassified amount Reclassified amount Reclassifications Lease receivables Current assets (a) 25,469 1,294,924 1,320,393 1,269,889 Long-term assets ,733 2,260,733 2,752,169 Leased assets (b) 6,268,550 (6,267,855) 695 (b) - Other liabilities - Other Liability for residual value on leases Current liabilities (523,336) 523, Long-term liabilities (2,188,862) 2,188, Income from lease operations 1,342,111 (1,026,781) 315, ,219 Expenses on lease operations (1,026,781) 1,026, (a) (b) Includes R$ 6,340 (R$ 7,695 in 2009) related to advances paid to suppliers and R$ (107) (R$ (60) in 2009) related to advance payments of commitment commissions. Relates to fixed assets leased out under operational leases. 15

16 (in thousands of reais) h. Provision for loan losses The provision for loan losses was constituted based on the credit risk evaluations of the clients and the specific operations, in accordance with CMN Resolution 2,682/99. For loan contracts contracted with clients for which exposure is less than R$ 50, the internal evaluation model is adopted, as permitted by CMN Resolution 2,697/00. Operations in default classified in rating H for 180 days are written-off against the provision amount and registered in off-balance sheet accounts where they remain for five years. i. 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. j. Property and fixed assets for own use The property and fixed assets are stated at cost net of depreciation and provision for losses in HSBC Bank and in HSBC Financial Conglomerate to the value of R$ 749 in 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, including a further lease period where there is a contractually specified lease period renovation. k. Leased assets Depreciation of leased assets is, in the majority of cases, calculated at annual rates over 70% of the estimated useful lives of the assets, in accordance with regulation 113 issued on 26 February 1998 by the 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 items and ten years for machinery, equipment, furniture and fixtures. 16

17 (in thousands of reais) l. Intangible assets Intangible assets are amortized over the period that best represents the expected period for generating economic benefits for the entity (reflecting the expected flow of benefits and if this can not be determined, they are amortized on a straight line basis). Intangibles comprise: - Future profitability of client portfolios acquired; - Acquisition of right to provide banking services; - Goodwill on the purchase of subsidiaries; and - Amounts spent on the purchase and development of software. The companies in the HSBC Financial Conglomerate perform impairment calculations at least every six months, and during the review performed in 2010, no material amounts were identified. m. Income and social contribution taxes The provision for income tax was calculated using a rate of 15% of taxable income, plus an additional 10% and the provision for social contribution tax was calculated using a rate of 15% of income before tax, adjusted according to current legislation. Deferred tax assets relate to timing differences for income and social contribution taxes and are included in Other receivables Other and Other liabilities - Taxes and social security payable and reflected in the income statement or, when applicable, in the shareholders equity. The deferred tax assets are recognised based on expectations of future realization over a timeframe not in excess of that permitted by the legislation in force. 17

18 (in thousands of reais) n. Contingent assets and liabilities and legal obligations (tax and obligatory retirement benefit contributions) The recognition, measurement and disclosures of contingent assets and liabilities and legal obligations follow the criteria defined in CMN resolution n 3,823/09. Contingent assets: Contingent assets are not recognized unless Management has total control over their realization or when there are real guarantees or favorable judicial decisions (and no further judicial recourse) the result of which is that the realization of the assets is practically certain. Contingent liabilities: These arise mainly from legal and administrative processes, inherent to the normal course of business, filed by third parties, ex-employees and public bodies, in civil, labor, tax and social security claims, and other risks. Consistent with the conservative practices adopted, these contingencies are evaluated by legal advisors and take into consideration the probability that financial resources will be required to settle the liabilities and that the liabilities can be estimated with sufficient accuracy. Despite the inherent uncertainty in the timing and value of the amounts the contingencies are determined using models and criteria and based on supporting documentation and historical data. The contingencies are classified as probable, for which provisions are recorded, or possible, which require disclosure, or remote, for which no provisions are recorded, as required by CMN Resolution 3,535/08. Legal obligations pertaining to tax and obligatory retirement benefit contributions: Amounts due under law, the constitutionality of which is being challenged in court. Amounts are fully provided for without considering the evaluation of the probability of loss. o. Foreign currency balances Foreign currency balances are recorded at the balance sheet date rates. 18

19 4 Interbank funds invested The summary of the account balances as of 30 June 2010 and 2009 is as follow: Less than 3 months From 3 months to 1 year HSBC Bank Above 1 year Money market - reverse repos 12,028,183 1,255,512-13,283,695 16,214,630 Counterparty's own assets 9,524,442 1,255,512-10,779,954 15,256,858 Third party's assets 2,503, ,503, ,772 Interbank deposits 1,222,973 1,474,025 1,282,484 3,979,482 5,117,954 Interbank deposits 1,222,973 1,474,025 1,282,484 3,979,482 5,117,954 Foreign currency investment 44, , ,619 Total 13,295,758 2,729,537 1,282,484 17,307,779 21,639,203 Current 16,025,295 20,791,896 Long-term 1,282, ,307 HSBC Financial Conglomerate Less than 3 months From 3 months to 1 year Above 1 year Money market - reverse repos 12,028,183 1,255,512-13,283,695 16,214,630 Counterparty's own assets 9,524,442 1,255,512-10,779,954 15,256,858 Third party's assets 2,503, ,503, ,772 Interbank deposits 1,080,270 1,090, ,260 2,813,024 4,655,035 Interbank deposits 1,080,270 1,090, ,260 2,813,024 4,655,035 Foreign currency investment 44, , ,619 Total 13,153,055 2,346, ,260 16,141,321 21,176,284 Current 15,499,061 20,592,952 Long-term 642, ,332 19

20 5 Securities and derivative financial instruments The summary of the account balances as of 30 June 2010 and 2009 is as follows: HSBC Bank HSBC Financial Conglomerate Current Long-term Current Long-term Trading 1,262,370 1,064, ,262,370 1,064, Available for sale 4,622,954 3,176,798 10,726,095 9,350,189 5,261,011 3,195,649 10,835,407 9,430,345 Held to maturity ,669 8,627 41, ,669 8,627 41,597 Derivatives 2,029,186 1,543, , ,656 2,029,186 1,543, , ,656 Sub-total 7,914,987 5,799,323 11,093,169 9,612,442 8,553,044 5,818,174 11,202,481 9,692,598 Futures 50,066 36, ,066 36, Total 7,965,053 5,835,328 11,093,169 9,612,442 8,603,110 5,854,179 11,202,481 9,692,598 a. Securities a.1 Trading The securities are presented below by their original due dates, in accordance with BACEN circular letter number 3,068, issued on 8 November HSBC Bank and HSBC Financial Conglomerate From From 1 From 3 From 5 Without Less than 3 months to 3 to 5 to 15 Above Fair Income Fair Income maturity 3 months to 1 year years years years 15 years value Cost (expenses) value (expenses) National Treasury Bills - 210, ,726 71, , ,301 (314) 326, Federal Treasury Bills - 2, ,205 5,996 7,675-18,325 18, , National Treasury Notes - 43, , , , ,500 11, , , ,254 (1,824) Foreign Bonds , ,792 34,722 3,070 41,663 2,294 Promissoy notes , ,533 27, , Shares 24, ,662 26,195 (1,533) 53,711 2,670 Total 24, , , , , ,175 11,338 1,262,370 1,260,470 1,900 1,064,936 4,570 20

21 a.2 Available for sale a HSBC Bank From From 1 From 3 From 5 Effect on Effect on Without Less than 3 months to 3 to 5 to 15 Fair shareholders Fair shareholders maturity 3 months to 1 year years years years value Cost equity value equity Federal Treasury Bills - 21,367 6,410 2, ,337 32, , ,428 (126) 312, National Treasury Bills - 1,463, ,607 2,250, ,950,537 3,957,835 (7,298) 2,363,808 84,402 Shares of Serasa 46, , ,278 41,941 41,472 National Treasury Notes - 2, ,353 5,947,677 1,085, ,097 8,292,269 8,279,342 12,927 7,297, ,912 Global bonds ,016 10,015 Notes from foreign issuers , , ,376 (4,741) 1,627,988 3,417 Debentures , , ,636 49, , ,004 (8,485) 364,807 (15,504) Other unlisted shares 238, , ,790 (1,574) 220,807 (9,267) Promissory notes - 923,823 48, , ,596 (1,772) 100,165 (619) Total 284,963 2,411,306 1,926,685 8,433,559 1,568, ,098 15,349,049 15,313,840 35,209 12,526, ,878 Current 4,622,954 3,176,798 Long-term 10,726,095 9,350,189 Tax effects (15,054) (98,958) Net effect on shareholders equity 20, ,920 Net effect on equity in subsidiaries - Fair value adjustment 9,068 6,696 Total 29, ,616 a HSBC Financial Conglomerate From From 1 From 3 From 5 Effect on Effect on Without Less than 3 months to 3 to 5 to 15 Fair shareholders Fair shareholders maturity 3 months to 1 year years years years value Cost equity value equity Federal Treasury Bills - 21,368 39,539 14, ,427 32, , ,942 (198) 407,191 (33) National Treasury Bills - 1,463, ,607 2,250, ,950,537 3,957,835 (7,298) 2,363,808 84,402 Shares of Serasa 51, , ,036 46,369 45,730 National Treasury Notes - 2, ,353 5,947,677 1,085, ,097 8,292,269 8,279,342 12,927 7,297, ,912 Global bonds ,016 10,015 Notes from foreign issuers , , ,376 (4,741) 1,627,988 3,417 Debentures , , ,636 49, , ,004 (8,485) 364,807 (15,504) Other unlisted shares 838, , ,790 (1,576) 220,807 (9,267) Promissory notes - 923,823 48, , ,596 (1,772) 100,165 (619) Total 889,890 2,411,307 1,959,814 8,445,781 1,665, ,098 16,096,418 16,056,525 39,893 12,625, ,053 Current 5,261,011 3,195,649 Long-term 10,835,407 9,430,345 Tax effects (17,062) (100,711) Net effect on shareholders equity 22, ,342 Net effect on equity in subsidiaries - Fair value adjustment 6,392 4,274 Total 29, ,616 21

22 a.3 Held to maturity a HSBC Bank and HSBC Financial Conglomerate From From 1 From 3 From 5 Less than 3 months to 3 to 5 to 15 Amortized Fair Amortized 3 months to 1 year years years years Cost value Cost Federal Treasury Bills ,784-7,784 7,774 8,792 National Treasury Notes ,320 1,300 46,474 Total , ,104 9,074 55,266 Current ,669 Long-term 8,627 41,597 The fair value of the securities is determined using quoted market prices available on the balance sheet date. If no market price quote is available, the amounts are estimated based on the quotes of dealers, pricing models or price quotes for instruments with similar characteristics. 22

23 (in thousands of reais) b. Derivative financial instruments HSBC Bank carries out operations involving financial instruments to meet its own needs and those of its customers and 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, determining limits set by the financial committee of HSBC Financial Conglomerate and monitoring closely the positions taken. The market value of the derivatives was calculated based on the average rates published by independent sources including BM&FBovespa, Reuters and Bloomberg. Derivative financial instruments designated as hedge HSBC Bank s risk management practice is to identify the exposure to risks from variations in interest rates and exchange rates on assets and liabilities (objects of hedge) and to use derivative instruments to minimize the impact of these variations. The assets and liabilities that are the object of cash flow hedges are mainly operations indexed to floating rates (interbank rate). As determined in rules and regulations issued by the Central Bank of Brazil, the variations in fair value for derivative instruments designated in cash flow hedge relationships are recognised in a specific shareholders equity account. 23