HSBC MÉXICO, S.A. INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO HSBC FINANCIAL REPORT AS OF MARCH 31, 2005

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1 April 29, Mexico City HSBC MÉXICO, S.A. INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO HSBC FINANCIAL REPORT AS OF MARCH 31, In compliance with the rules and principles applicable to the financial information of credit institutions issued by the Mexican National Banking Commission Comision Nacional Bancaria y de Valores (CNBV) on June 30, 2003, related to the disclosure of financial information presented in the current report, please find enclosed the consolidated financial statement of HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC as of March 31,. The figures included in the current report are in millions of Mexican pesos expressed in constant prices as of March 31,, unless otherwise explicitly indicated. Contents CEO Commentary - 1Q05 Result Summary 1 HSBC s Corporate Social Responsibility (CSR) Programme in Mexico 1 Consolidated Balance Sheet 3 Consolidated Income Statement 6 Consolidated Statement of Changes in Shareholder s Equity 7 Consolidated Statement of Changes in Financial Position 8 Key Indicators 8 Variance Analysis of Balance Sheet and Income Statement 9 Financial Instruments 10 Loan Portfolio 11 Deferred Taxes 13 Funding, Loans and Investment in Securities 14 Capital 14 Other Expenses, Other Income and Extraordinary Items 15 Market Risk Management 15 0

2 Financial Report as of HSBC First Quarter Financial Results Summary Commentary by Sandy Flockhart, CEO HSBC Mexico: HSBC reported strong results in the first quarter. Net income totaled 1,003 million pesos, representing a 50 per cent increase from prior year. The Growth in our core Personal Financial Services and Commercial Banking businesses was robust, with broad-based loan growth throughout the bank. Commercial lending continued to increase in the first quarter, growing by 53 per cent versus 1Q04. This was coupled with accelerating growth in consumer, credit card, automobile, and mortgage lending. HSBC is proud to offer one of the lowest mortgage rates in the market (11.8% fixed rate for 15 years, with only 20% down). HSBC does not charge for pre-payments throughout the life of the loan, and offers life, damage, and unemployment insurance to better protect our customers. The monthly fixed payments are more transparent for our customers, and as an additional benefit, the real interest portion of each payment is deductible against taxes. Furthermore, HSBC s market share in international remittances continues to expand, representing a five-fold increase over the last few years from 3.4 per cent in December 2002 to 17.3 per cent in February. This has contributed to a 100% annual increase in fee income. Strategic partnerships have helped to boost the growth rate, with continued growth supported by stronger synergies with our extensive branch network in the United States. Our newly established trade services business now contributes meaningful revenues, while steadily growing its market share and recording fee income growth of over 190% versus prior year. We are pleased with the success of Tu Cuenta in attracting new customers and benefiting existing ones. Launched in February, this integrated package of financial services includes a checking account, credit/debit card(s), credit line, time deposits, mutual funds, telephone & internet banking, among other services. With Tu Cuenta, customers pay only a monthly maintenance fee, which covers their transactions, representing a saving of up to 60% versus other banks. Furthermore, current and future customers can obtain all these services in a one-step process, saving valuable time. Finally, the capital adequacy ratio of HSBC remains strong at 14.8 per cent as at 31MAR05. Versus prior year, nonperforming loans declined 36 per cent, and the ratio of loan loss reserves to non-performing loans reached 187 per cent. The bank s capital position and overall balance sheet strength will enable us to compete effectively in the market in supporting our customers financial expansion plans in the years ahead. The HSBC Group HSBC Group is one of the four largest banking and financial services institutions in Mexico, with some 1,400 branches, 4,600 ATMs, and over 20,000 employees. HSBC is a directly held, per cent owned subsidiary of HSBC Holdings plc. With global headquarters in London, UK, the HSBC Group serves over 110 million customers world-wide from more than 9,800 offices in 77 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of US$1,277 billion at 31 December, HSBC is one of the world's largest banking and financial services organisations. HSBC is marketed worldwide as 'the world's local bank'. Media Enquiries to: HSBC: London Karen Ng/Richard Beck Tel: (44) (0) /0633 Mexico City Roy Caple Tel: 52 (55) Investor Relations Enquiries to: HSBC: London Patrick McGuinness Tel: (44) (0) Mexico City Geoffrey Fichte Tel: 52 (55)

3 Financial Report as of HSBC s Corporate Social Responsibility Programme in Mexico For HSBC, Corporate Social Responsibility (CSR) means supporting the communities in which we operate, managing our business in a responsible manner and maintaining the highest ethical standards in our relations with customers, employees, investors and suppliers. CSR also means being aware of the impact of our business decisions while complying with the laws of the countries in which we operate. Our aim in Mexico is to be the leading financial services company in Mexico in the eyes of our customers. By leading, we mean preferred, admired, and dynamic, recognizing the strength of our brand, our corporate character, and our earnings growth. Our strategy; Managing for Growth is an aggressive road map for marshalling our resources in the best interests of customers, shareholders, staff, and other stakeholders. HSBC s core values are integral to achieve this goal. These values comprise a preference for long-term, ethical client relationships, personal integrity, and striving to continuously improve customer service. HSBC Mexico s corporate social responsibility community programmes focus on education, health, and the environment. We consider that these are the areas where we can have a higher impact. In support of the Tsunami victims in Asia, HSBC Mexico s employees donated MXP 2,574,144 to Save the Children, an international children s charity organisation that is working directly in the South Eastern Asia with children affected by this terrible tragedy. Additionally, through our donation programme in ATMs, Niños con Futuro, our customers donated MXP 1,669,395, to Save the Children, to help improve the lives of children in the affected region. Through the British Mexican Friendship Society (Amistad), HSBC Mexico donated USD 1.5 million dollars over a five-year period to support secondary, technical and preparatory schools throughout Mexico. This will include the annual adoption of four schools in order to improve buildings, equipment, programmes and fostering exchange visits for gifted children with schools in the United Kingdom. HSBC Mexico also donated USD 1 million over the next five years to be used for the construction and operation of the AMISTAD ABC CLINIC that will operate in the new facility which the ABC Hospital built in Santa Fé. The clinic will provide health care services to more than 7,000 members of the surrounding communities who do not have access to public or private health care systems. Additional donations went to several charities that support cancer treatment for children, that house, educate and help homeless children, and to provide education and support for underprivileged children. In terms of HSBC Mexico s participation in environmental programmes, in, more than 30 members of our staff participated in the ongoing programme agreed by HSBC Group with Earthwatch, which is identifying more than 25,000 flora and fauna species in a five year period around the world. Additionally, Mexico will benefit from the USD 17 million dollar commitment made by HSBC Group to the World Wildlife Fund to study the problems and solutions of the pollution in three major rivers around the world, one of them being the Río Bravo on the Mexico-U.S. border. HSBC Mexico has also begun to implement the guidelines established by the Group that require environmental standards to be taken into account in project financing, as well as in corporate and business loans which could have an effect on the environment. Through our ATM donations programme, branded as Niños con Futuro each time our clients use an ATM, they have the option to donate specific amounts of money, which is channelled to different charity organisations in six regions of the country. The programme is aimed at supporting institutions that focus on improving underprivileged children s quality of life in three areas: education, healthcare and nutrition. HSBC absorbs the operating cost of the programme. Since the ATM programme was set up it has benefited more than 32,633 children in the areas of education and healthcare. As of September, the total amount raised through the programme was 36 million pesos. The programme received a best community practice award in from the Mexican Centre for Philanthropy (CEMEFI) and Alliarse por México. As the World s Local Bank, HSBC recognises fully the importance of our wider obligations to society and calls for the increasing involvement of our colleagues in corporate social activities, especially in our support for education, health, and the environment. 2

4 Financial Report as of Consolidated Balance Sheet Figures in MXN Millions March 31 Assets June 30 Sept 30 Dec. 31 March 31 Cash and deposits in banks... 34,990 38,366 38,637 43,630 48,925 Financial instruments... 28,135 23,556 29,296 44,512 35,935 Trading securities 12,707 4,378 1,011 2,668 - Available for sale securities 8,717 12,831 23,518 37,789 32,010 Securities held to maturity 6,711 6,347 4,767 4,055 3,925 Securities and derivative operations Repurchase agreements Operations that represent loans with collateral Non assigned securities to pay Derivative transactions Performing loans Commercial loans 19,623 20,470 20,096 27,535 29,990 Loans to financial intermediaries 1,820 1,673 3,278 4,039 3,324 Consumer loans 14,788 14,364 14,307 14,803 15,417 Mortgage 11,584 11,513 11,658 12,079 12,485 Loans to government entities 6,316 6,005 5,830 6,333 7,172 Loans to Fobaproa or IPAB 58,292 58,457 57,895 42,058 42,136 Total current loans 112, , , , ,524 Non-performing loans Commercial loans 4,158 3,823 2,540 1,899 1,948 Loans to financial intermediaries Consumer loans Mortgage Loans to government entities Immediate collection, remittances and other Total non-performing loans 5,401 5,222 4,058 3,300 3,324 Total loan portfolio 117, , , , ,848 (-) Allowance for loan losses (8,351) (8,257) (7,072) (6,441) (6,233) Net loan portfolio , , , , ,615 Other accounts receivable... 17,192 10,419 10,251 3,963 10,325 Foreclosed assets Property, furniture and equipment, net... 3,477 3,514 3,596 4,024 4,256 Long term investments in equity securities Deferred taxes... 3,099 2,602 2,533 2,150 1,924 Other assests, deferred charges and intangibles Total Assets 198, , , , ,923 3

5 Financial Report as of Figures in MXN Millions March 31 Liabilities June 30 Sept 30 Dec. 31 March 31 Deposits , , , , ,681 Demand deposits 90,637 96,036 95, ,645 98,715 Time deposits 66,842 58,327 63,090 62,847 67,966 Bank bonds outstanding Bank deposits and other liabilities... 8,495 10,220 10,517 9,037 10,184 On demand Short term 5,610 7,665 7,531 6,232 7,793 Long term 2,593 2,555 2,720 2,567 2,391 Assigned securities to pay Securities and derivative transactions Repurchase agreements Operations with derivative instruments Derivative transactions Other accounts payable... 17,034 10,979 12,059 8,902 17,805 Income tax and employee profit sharing payable Sundry creditors and others accounts payable 17,034 10,800 11,666 8,234 17,391 Subordinated debentures outstanding... 2,302 2,304 2,265 2,220 2,211 Deferred tax Deferred credits Total Liabilities , , , , ,242 Stockholder s Equity Paid in capital... 10,086 10,086 10,086 10,086 10,086 Capital stock 3,419 3,419 3,419 3,419 3,419 Additional paid in capital 6,667 6,667 6,667 6,667 6,667 Mandatorily convertible subordinated debentures Capital Gains... 2,953 1,847 2,635 2,959 3,594 Capital reserves 2,640 2,489 2,489 1,911 1,911 Retained earnings 1, ,119 Surplus from mark to market of available for sale securities 65 (138) (133) 16 (297) Result from translation of foreign operations Cumulative effect of restatement (3,158) (3,206) (3,154) (3,167) (3,226) Gains on non monetary asset valuation Valuation of fixed assets 1,217 1,217 1,217 1,217 1,217 Valuation of permanent investments (139) (114) (142) (148) (145) Adjustments to retirement fund obligations Net Income 670 1,588 2,347 3,119 1,004 Minority interest in capital Total Stockholder s Equity... 13,040 11,935 12,722 13,047 13,681 Total Liabilites and Capital , , , , ,923 4

6 Financial Report as of Figures in MXN Millions March 31 Memorandum Accounts June 30 Sept 30 Dec. 31 March 31 Guarantees granted Other contingent obligations 18,779 15,351 20,631 9,438 11,096 Irrevocable lines of credit granted ,081 2,206 3,084 Goods in trust or mandate 51,372 61,283 61,223 62,183 63,026 Goods in custody or under administration 91, ,639 79,305 49,435 50,971 Third party investment banking operations, net 25,110 15,719 17,991 25,051 31,981 Amounts commited in transactions with Fobaproa 7,754 7,773 1, Amounts contracted in derivative operations 46,555 55,907 73,065 92, ,106 Investments of retirement savings system funds 2,683 2,805 2,869 2,891 3,053 Integrated loan portfolio 119, , , , ,119 Other control accounts 325, , , , , , , , , ,779 Securities receivable under repos 43,773 49,824 42,359 36,309 36,347 (less) Repurchase agreements (43,678) (49,725) (42,292) (36,280) (36,379) (32) Reverse repurchase agreements 20,655 27,970 15,433 6,059 7,517 (less) Securities deliverables under repos (20,666) (27,995) (15,430) (6,061) (7,472) (11) (25) 3 (2) 45 The present statement was prepared in accordance to the accounting principles for banking institutions, which are issued by the Mexican National Banking Commission as specified in articles 99, 101 y 102 of the Law for Credit Institutions, of general observance and mandatory, applied in a consistent manner, this statement reflects all operations performed by the institution up to the date mentioned above, these operations were performed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of signing officers. Historical paid in capital of the Institution amounts to MNX 2,003 millions. Section: English, HSBC Group, Investor Relations, Financial Information. 5

7 Financial Report as of Consolidated Income Statement Figures in MXN millions For the quarter ending YTD 30 June Interest income 4,429 4,630 4,324 5,235 5,554 4,429 5,554 Interest expense (-) 1,827 1,807 1,374 1,945 2,085 1,827 2,085 Monetary position (margin), net (48) 2 (72) (148) (39) (48) (39) Net interest income... 2,554 2,825 2,878 3,142 3,430 2,554 3,430 Loan-loss provisions (-) Loan loss provisions bank Loss sharing Fobaproa Risk adjustment net interest income... 2,161 2,530 2,502 2,874 3,195 2,161 3,195 Fees and commissions... 1,640 1,698 1,758 1,925 1,683 1,640 1,683 Account management Services 1,253 1,281 1,362 1,547 1,326 1,253 1,326 Fees Paid... (170) (173) (166) (247) (196) (170) (196) Trading Income Foreign exchange (52) 100 (52) Securities trading, net Repo s (1) (1) 22 Valuation off-shore agencies (14) (30) Total operating income... 3,921 4,144 4,362 4,792 4,896 3,921 4,896 Administrative and personnel expenses (-)... 2,881 2,664 3,077 3,335 3,322 2,881 3,322 Personnel expense 1,228 1,212 1,327 1,463 1,419 1,228 1,419 Administrative expense 1,506 1,296 1,599 1,707 1,723 1,506 1,723 Depreciation and amortization Net operating income... 1,040 1,480 1,285 1,457 1,574 1,040 1,574 Other income Other expenses (129) (210) (257) (442) (165) (129) (165) Net income before taxes... 1,016 1,740 1,241 1,521 1,625 1,016 1,625 Income tax and employee profit sharing (4) (184) (452) (530) (241) (4) (241) Deferred income tax (344) (641) (28) (223) (381) (344) (381) Net income before subsidiaries , ,003 Undistributed income from subsidiaries Income from ongoing operations , ,003 Discontinued operations, extraordinary items and changes in accounting standards, net - - (7) Minority interest Net income (loss) , ,003 The present income statement was prepared in accordance to the accounting principles for banking institutions, which are issued by the Mexican National Banking Commission as specified in articles 99, 101 y 102 of the Law for Credit Institutions of general observance and mandatory, applied in a consistent manner. This statement reflects all income and expenses derived from the operations performed by the Institution up to the date mentioned above. These operations were performed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of signing officers. Section: English, HSBC Group, Investor Relations, Financial Information. 6

8 Financial Report as of Consolidated Statement of Changes in Shareholder s Equity From December 31 to March 31, Figures in Millions of MX Pesos Paid in Capital Capital Gains Capital Paid-in stock capital Update of paid in capital Additional Update of paid in additional paid capital in capital Capital Reserves Update of capital reserves Retained earnings Surplus from mark to market Result from Update of of available translation of retained earnings for sale securities foreign operations Update of restatement Update of restatement Valuation of fixed assets Valuation of Adjustments to permanent retirements investmentsfund obligations Net income Minority Interest Total Stockholders Equity Balances as of December 31, 2,003-1,395 5,127 1,499 1, (3,147) - 1,210 (148) - 3, ,968 Movements Inherent to the Shareholders Decision Transfer of result of prior years , (3,100) - - Constitution of reserves Payment of dividends Others Total , (3,100) - - Movements for the Recognition of the Integral Income Integral Income -Net result ,004-1,004 -Surplus from mark to market of available for sale securities (311) (311) -Result from translation of foreign operations Cumulative effect of restatement (2) - - (80) 7 (1) Gains on non-monetary asset valuation Adjustments to retirement fund obligations Others Total (313) - - (80) 7 3-1, Balances as of March 31, 2,003-1,416 5,127 1,540 1, , (297) 11 (3,147) (80) 1,217 (145) - 1, ,682 The present statement of changes in stockholder s equity was prepared in accordance to the accounting principles for banking institutions which are issued by the Mexican National Banking Commission as specified in articles 99, 101 y 102 of the Law for Credit Institutions of general observance and mandatory, applied in a consistent manner. This statement reflects all movements in capital accounts derived from the operations performed by the Institution up to the date mentioned above. These operations were performed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of signing officers. 7

9 Financial Report as of Consolidated Statement of Changes in Financial Position From January 1 to March 31, Figures in MXN millions Operating activities Net income... 1,004 (Deduct)-Charges (credits) to income not requiring (providing) funds: Depreciation and amortization 180 Allowance for loan losses 235 Provisions for loan losses 21 Gains / (losses) from mark to market valuations (196) Deferred taxes 381 Undistributed income from subsidiaries - Increase (reduction) of the minority interest - 1,625 Changes in Operating Accounts: Increase (decrease) in retail deposit and money desk (3,811) Increase (decrease) of interbank and other loans 1,147 Amortization of interbank and other loans - Increase (decrease) of loan portfolio (4,104) Increase (decrease) of financial instruments 8,507 Increase (decrease) of other receivable and payable accounts 2,364 Funds provided by operations... 5,728 Financing Activities: Subordinated debentures outstanding (9) Increase (decrease) in capital - Amortization of mandatory convertible subordinated debentures - Result from foreign currency transactions - Convertible subordinated debentures - Fiscal results of agencies - Funds provided by financing activities... (9) Investing Activities: Increase (decrease) of property, furniture and equipment and long term investments (463) Increase (decrease) in deferred credits 39 Increase (decrease) in loans to employee - Funds used in investing activities (424) Increase (decrease) in funds available... 5,295 Funds available at beginning of period... 43,630 Funds available at end of period... 48,925 The present statement of changes in financial position was prepared in accordance to the accounting principles for banking institutions, which are issued by the Mexican National Banking Commission, as specified in articles 99, 101 y 102 of the Law for Credit Institutions of general observance and mandatory, applied in a consistent manner. This statement reflects all movements in funds derived from the operations performed by the Institution up to the date mentioned above. These operations were perfomed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of signing officers. Key Indicators For the quarter ending June 31 Dec Non performing loans / total loans ratio 4.58% 4.44% 3.46% 3.00% 2.92% Non performing loans / total loans ratio, (excluding Fobaproa/IPAB) % 8.81% 6.85% 4.85% 4.64% Coverage ratio % % % % % Operative efficiency % 5.49% 6.37% 6.67% 6.41% Cost: income % 60.01% 64.96% 65.92% 64.74% Net interest margin (NIM) % 5.79% 5.53% 5.89% 6.53% 8

10 Financial Report as of For the quarter ending June 31 Dec Net interest margin before allowance 5.81% 6.47% 6.36% 6.44% 7.01% Return on average equity (ROAE) 21.11% 29.40% 24.62% 23.97% 30.05% Return on assets (ROA) % 1.89% 1.57% 1.54% 1.94% Capitalization ratio Credit risk % 20.80% 22.46% 20.24% 19.56% Credit and market risk % 14.95% 15.72% 13.69% 14.77% Liquidity % 53.59% 61.22% 73.69% 75.99% Variance Analysis of Balance Sheet and Income Statement During the first quarter of, the bank maintained its strong growth trends, growing the balance sheet and improving asset quality. At 31MAR05, total assets amounted to MXN 210,923 million, representing an increase of 6.3% versus prior year and 3.5% versus prior quarter. Balance sheet growth was achieved principally through strong growth in deposits, an area where HSBC increased its market share to 14.6% at MAR05, versus 13.5% at MAR04 and 14.4% at DEC04. Deposit growth totaled MXN 9,202 million over the previous 12 months, thanks in part to new product innovations (Tu Cuenta) and improved customer service. Furthermore, investment funds and time deposits have seen record growth rates and their expanded offering has been well-received by the market. This deposit growth has funded a significant expansion of the credit portfolio, both commercial and consumer, which much of this growth starting from mid-year, and reflects HSBC s strategy to be a key corporate banking player in Mexico. This strategy is well underway and is based on the strong, full-spectrum corporate relationships that HSBC has throughout the world with key companies. The credit portfolio (excluding IPAB/Fobaproa) was MXN 68,388 at 31MAR05, representing a significant increase from MXN 54,131 at 31MAR04 and 64,789 at 31DEC04. Furthermore, consumer lending has also increased, with annual growth of 22% in auto, 172% in mortgage, and 38% in credit card. An improved economic environment, coupled with HSBC s strict credit risk management, have resulted in better credit quality throughout the bank. Loan loss reserves amounted to MXN 6,233 million at 31MAR05. In addition to the growth in the credit portfolio, HSBC has increased its investment in financial instruments, which has grown by MXN 7,800 million (or 28%) versus prior year. At 31MAR05, this portfolio totaled MXN 35,935 million. HSBC s capital adequacy remains strong, reaching 14.77% at 31MAR05. This has been achieved via profit generation and prudent market/credit risk management. In 1Q05, net interest income totaled MXN 3,430 million, or 34% above prior year, due to deposit and loan growth, in addition to higher interest rates. Fees and commissions remained relatively flat versus prior year, and trading income decreased by 26%, due to the rise in interest rates. Overall, total operating income grew by 25% versus prior year. Although the bank increased its headcount, the overall increase in expenses of 15.3% versus prior year was less than the increase in revenue over the same period. This contributed to growth in net operating income of 51.3% versus prior year. Net operating income for the quarter totaled MXN 1,574 million. Furthermore, the bank improved its cost:income ratio from 66.8% in 1Q04 to 64.7% in 1Q05. The bank created loan-loss provisions of MXN 235 million in 1Q05, which was less than the MXN 393 million provisioned in 1Q04. The combination of the aforementioned factors resulted in net income of MXN 1,003 million in 1Q05, which was 50% above 1Q04. 9

11 Financial Report as of Financial Instruments 30 June Government securities 1,397 (1,299) (542) 674 (392) Fiduciary certificates Bank securities 10,017 4, , Shares Sovereign government debt bonds Others 1, Trading securities... 12,707 4,378 1,011 2,668 (257) Government securities 5,922 9,978 19,490 31,774 24,550 Fiduciary certificates ,852 2,013 1,984 Bank securities Obligations and other securities 2,511 2,332 2,164 3,679 5,163 Shares Available for sale securities... 8,717 12,831 23,518 37,789 32,010 Sovereign debt securities 960 1, Commercial and industrial subordinated debentures Fiduciary certificates Special Cetes (net) 4,923 4,991 3,654 3,059 3,118 FRN. Serfín Treasury Bills Myras Other debt securities Securities held to maturity... 6,711 6,346 4,767 4,055 3,925 Total Financial Instruments... 28,135 23,556 29,296 44,512 35,678 In 1Q05, there was a MXN 8,831 million decrease in Financial Instruments versus prior quarter, mainly due to a MXN 7,224 million decrease in Government Securities (mainly bonds and Cetes), a MXN 1,065 million decrease in value date transactions, a MXN 1,859 million decrease in promissory notes (Pagarés), a MXN 1,484 million increase in Global UMS. Repurchase Agreements 30 June Government securities (debit) 38,698 46,409 38,112 33,385 35,734 Bank securities (debit) 4,923 3,255 4,123 2, Bank securities (own) Valuation Increase (decrease) (5) Interest in securities receivable under repurchase agreements Total in repo agreements (debit) 43,773 49,824 42,359 36,309 36,347 Repo s Government securities (credit) 38,698 46,409 38,112 33,385 35,734 Repo s Bank securities (credit) 4,923 3,255 4,123 2, Repo s Bank securities (own) Valuation increase (decrease) 3 (1) (1) 1 (1) Accrued interest payable Credit balance in repo agreements 43,678 49,726 42,292 36,280 36,379 Repurchase agreements in government securities 8,034 24,099 13,882 6,036 7,500 Repurchase agreements in banking securities 12,607 3,851 1, Valuation increase (decrease)

12 Financial Report as of Accrued interest receivable Debit balance repo securities agreements 20,655 27,970 15,434 6,058 7,517 Government securities 8,034 24,099 13,882 6,036 7,500 Bank securities 12,607 3,851 1, Valuation increase (decrease) 8 26 (1) 4 (43) Interest in securities deliverable under repurchase agreements Credit balance repo securities agreements 20,666 27,995 15,431 6,061 7,472 Derivative Financial Instruments At, Futures Forwards Contracts Options Swaps Asset position Liability position Asset position Liability position Asset position Liability position Asset position Liability position For trading... Pesos ,532 40, US Dollars - - 3,518 4, Interest Rate 35,233 35, ,751 44,727 For hedging... Pesos ,346 4, US Dollars Interest Rate , Trading Income For the quarter ending 30 June YTD Valuation (13) (32) Derivatives (20) Repo s 47 (25) 6 (34) (27) 47 (27) Shares Debt Securities (1) Buying and Selling Instruments Foreign Currency (52) 100 (52) Derivatives 6 (8) - 2 (4) 6 (4) Repo s 38 (6) Shares 3 (2) Debt Securities (8) Total Loan Portfolio By type of currency At March 31, Commercial loans Ipab / Fobaproa Consumer loans Mortgage loans Government loans Performing loan Portfolio Pesos 22,219 3,095 15,417 8,270 6,732 US Dollars 7, Udis Banxico ,211 - Total... 29,990 3,324 15,417 12,485 7,172 11

13 Financial Report as of Non performing loan portfolio Pesos 1, US Dollars Udis Banxico Total... 2, Loan Portfolio Grading At March 31, Loan Portfolio Allowances for loan losses per category Commercial loans Consumer loans Mortgage loans Total reserves Exempted from rating... 42,649 Graded... 74,470 A Risk 42, A-1 Risk A-2 Risk B Risk 27, B-1 Risk B-2 Risk B-3 Risk C Risk 1, C-1 Risk C-2 Risk D Risk ,184 E Risk 1,248 1, ,235 Total ,119 3,216 1, ,101 Less: Constituted Reserves... 6,234 Surplus... 1, Loan portfolio grading and creation of reserves figures as of. 2. The loan portfolio is rated in accordance to the methology for the classification and creation for loan losses issued by the Ministry of Finance and the methodology issued by CNBV. For commercial and mortgages loans internal methodology can be used with prior authorization by CNBV. The institution applies the Credit Risk + TM methodology for the commercial loans, for the mortgage loans established in circular 1460 and for the consumer loans established in 1493 y 1449 circulars. 12

14 Financial Report as of Non performing loans For the quarter ending 30 June Initial balance of non performing loan portfolio 5,177 5,010 3,946 3,280 Increases 2,781 2,866 3,701 3,337 Transfer of current loans to past due status 2,781 2,866 3,701 3,337 Purchase of portfolio Suspended interest Decreases (2,987 ) (3,944 ) (4,377 ) (3,300 ) Restructurings (180 ) (51 ) (72 ) (5 ) Liquidated credits (2,150 ) (2,730 ) (3,383 ) (2,413 ) Charged in cash (1,687 ) (1,180 ) (2,496 ) (2,094 ) Foreclosed assets (9 ) (22 ) (6 ) (14 ) Writeoffs (453 ) (1,528 ) (881 ) (306 ) Sale of portfolio - - (207) - Transfer to performing loan status (657 ) (1,163 ) (715 ) (882 ) Fx revaluations Interest capitalization Final balance of non performing loan portfolio 5,010 3,946 3,280 3,324 Deferred Taxes 30 June Loan losses reserves 3,110 2,850 2,528 2,182 1,832 Valuation of securities (38) 156 Fiscal loss Loss sharing - - 2,150 2,096 2,124 Other Differences in rates of fixed assets (386) (357) (177) (365) (359) Fiscal result UDIS-Banxico (568) (521) (2,052) (1,870) (1,892) Total Deferred taxes... 3,099 2,602 2,533 2,150 1,924 13

15 Financial Report as of Funding, Loans and Investment in Securities Funding and bank loans Interest rates Average For the quarter ending June Loans in MXN pesos Funding 1.80% 1.95% 2.22% 2.43% 2.71% Bank and other loans 5.52% 5.85% 6.21% 7.23% 8.09% Loans in foreign currency Funding 0.48% 0.46% 0.51% 0.56% 0.69% Bank and other loans 1.98% 2.13% 2.51% 2.86% 3.19% UDIS Funding 0.79 % 0.81% 0.81% 0.81% 0.64% Long Term Debt HSBC has long term debt subordinated obligations, which are registered in the Mexican Stock Exchange (BMV). These instruments pay monthly interest at a rate equivalent to the average 28-day TIIE (interbank rate) of the previous month. Instrument Issue Date Amount Currency Millions of MXN Amount in circulation Millions of MXN Date of maturity INTENAL NOV ,200 MXN 2, NOV-2013 Capital 2,200 2,200 Movements in Capital In 1Q05, there were no movements in capital for HSBC Mexico. Capital adequacy ratio was 14.77% at 31MAR05, versus 16.18% at 31MAR04 and 13.69% at 31DEC04. Capitalization Ratio Figures in MXN Millions 30 June % of assets subject to credit risk Tier % 16.19% 17.96% 16.11% 16.11% Tier % 4.61% 4.50% 4.13% 3.45% Total regulatory capital % 20.80% 22.46% 20.24% 19.56% % of assets subject to credit and market risk Tier % 11.66% 12.57% 10.90% 12.17% Tier % 3.32% 3.15% 2.80% 2.61% Total regulatory capital % 14.98% 15.72% 13.69% 14.77% Tier 1 11,323 10,706 12,052 11,904 12,726 Tier 2 3,040 3,048 3,018 3,053 2,726 Total regulatory capital... 14,363 13,754 15,070 14,957 15,452 RWA credit risk 65,230 66,134 67,111 73,895 78,984 RWA market risk 23,523 25,664 28,738 35,326 25,621 RWA credit and market risk... 88,753 91,798 95, , ,605 14

16 Financial Report as of Other Expenses, Other Income and Extraordinary Items Figures in MXN Millions For the quarter ending YTD 30 June Other income Loans to employees Recoveries Other income Result from monetary position (other income) Other expenses Other losses (44) (201) (220) (414) (162) (44) (162) Result from monetary position (other income) (85) (9) (36) (28) (3) (85) (3) (129) (210) (257) (442) (165) (129) (165) Total other income (expenses)... (24) 262 (43) (24) 51 Discontinued operations, extraordinary items and changes in accounting standards - - (7) YTD Other Income increased percent versus prior year, mainly driven by greater recoveries and sale of foreclosed assets. YTD Other Losses increased by percent versus prior year. Market Risk Management Market risk management is defined as the potential loss triggered by changes in risk factors (interest rates, exchange rates, price changes, among others) relating to the valuation or future expected results of assets, liabilities, and other contingencies. At HSBC, the objective of market risk management is to identify, measure, watch, limit, control, inform, and report the institution s risks exposure. HSBC utilises Value at Risk (VaR) and Present Value of a Basis Point (PVBP) to measure market risk. Both measures are monitored on a daily basis to measure risk exposure compared to the limits, as determined by Group policies. The VaR is obtained via a MonteCarlo simulation, which estimates the potential losses according to movements in market risk factors. Utilising a confidence interval of 99%, and a one-day time interval, the VaR figure represents (with a 99% probability) the maximum loss that the bank could possibly experience per day. The PVBP is a measure of risk exposure due to the movement in interest rates (in pesos, dollars, and any other currency) on the bank s position. This measure shows the potential loss to the bank s assets and liabilities caused by a one basis point movement in interest rates. It is important to mention that in order to calculate the VaR and PVBP, all the bank s positions are marked to market. Furthermore, the bank s VaR and PVBP are presented for the Trading and Accrual Book portfolios for 1Q05 (figures in USD millions). Value at risk (VaR) USD Millions 1Q05 Average Limits Bank (9.63) (5.19) (6.21) Accrual (9.66) (4.79) (6.07) Trading (0.60) (0.57) (0.61) Fx desk (0.03) (0.06) (0.10) Money market desk (0.60) (0.57) (0.59)

17 Financial Report as of PVBP for interest rates (in pesos) 31 December 1Q05 Average Limits* Bank 0.07 (0.09) (0.07) Accrual 0.14 (0.05) (0.03) Trading (0.07) (0.04) (0.04) Money market desk (0.07) (0.04) (0.04) *Absolute Value Note: The majority of HSBC s interest rate risk exposure is explained by the PVBP for pesos. The interest rate risk for other currencies (also measured by PVBP) is practically insignificant. The VaR calculations at 31MAR05 use a confidence interval of 99% and the quarterly average is indicative fo the VaR. The average VaR in 1Q05 declined 35% from the prior quarter and the period-end VaR in 1Q05 decreased 46% versus the close of the prior quarter, with both indicators benefiting from lower overall risk exposure. The period-end VaR for the quarter was significantly below the quarterly average, representing an overall downward trend market risk exposure. Finally, it is important to note that during the entire period, the VaR remained below the limits established by the administration. The average PVBP for peso interest rates in 1Q05 increased by 9% compared to the close of prior quarter. This reflects a similar level of exposure to interest rate risk in the net position of the bank. Furthermore, PVBP remained below the pre-established limits. PVBP measures risk exposure only related to interest rate movements (increase in each basis point), while VaR measures the potential loss due to adverse movements in various risk factors (interest rates, exchange rates, etc.); therefore, changes in the measurements will not always be in the same direction. In order to calibrate the models and evaluate their accuracy, backtesting and sensitivity analysis are regularly performed to fine-tune the accuracy of HSBC s VaR and PVBP measurements. The results of these tests confirm the accuracy of the models. 16