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Financial

HSBC Bank Canada Third Quarter 2015 Results

Vancouver - Profit before income tax expense for the quarter ended 30 September 2015 was C$187m, a decrease of 19.0% compared with the same period in 2014. Profit before income tax expense was C$645m for the nine months ended 30 September 2015, a decrease of 8.6% compared with the same period in 2014.

Profit attributable to the common shareholder was C$128m for the quarter ended 30 September 2015, a decrease of 21.5% compared with the same period in 2014. Profit attributable to the common shareholder was C$452m for the nine months ended 30 September 2015, a decrease of 8.7% compared with the same period in 2014.

Return on average common equity was 11.0% for the quarter ended 30 September 2015 and 13.1% for the nine months ended 30 September 2015 compared with 14.5% and 15.0% respectively for the same periods in 2014.

The cost efficiency ratio was 57.5% for the quarter ended 30 September 2015 and 55.1% for the nine months ended 30 September 2015 compared with 52.3% and 51.8% respectively for the same periods in 2014.

Total assets were C$93.6bn at 30 September 2015 compared with C$88.2bn at 31 December 2014.

Common equity tier 1 capital ratio was 10.3%, tier 1 ratio 12.3% and total capital ratio 13.5% at 30 September 2015 compared with 10.6%, 12.0% and 13.5% respectively at 31 December 2014.

Financial Commentary - Overview

HSBC Bank Canada reported a profit before income tax expense of C$187m for the third quarter of 2015, a decrease of C$44m, or 19%, compared with the third quarter of 2014 and a decrease of C$40m, or 18%, compared with the second quarter of 2015. Profit before income tax expense for the year to date was C$645m, a decrease of C$61m, or 9% compared with the same period in 2014.

Profit before tax was lower, mainly as a result of lower net interest margins, lower gains on financial investments, higher loan impairment charges and higher planned costs, partially offset by increased credit facility and corporate finance fees from the comparative periods in 2014.

Commercial Banking continues to make progress in growing our business and streamlining processes. Strong momentum in new-to-bank activities continued increasing 47% year-over-year. However, the current environment has tempered utilization of authorized credit facilities and capital spending. Initiatives to streamline credit application and client on-boarding processes helped to improve front-line productivity and increase focus on our customers' needs.

By more fully leveraging our global network on behalf of our clients, Global Banking and Markets lending and credit activities and capital market fees continued to increase.

During the quarter, Retail Banking and Wealth Management continued to achieve sustainable and balanced growth in residential mortgages and deposits, and benefitted from increases in wealth balances during the first half of the year. The business continues to deliver a resilient performance given the highly competitive low interest rate environment with spread compression impacting liability margins.

Commenting on the results, Sandra Stuart, President and Chief Executive Officer of HSBC Bank Canada, said: "While the continued slow growth, low rate environment is challenging our revenue line, the prudent approach we have taken to managing our business and the risks in our portfolio has ensured that we remain profitable and well capitalized. In Retail Banking and Wealth Management, core retail banking products including mortgages continued to grow, as did wealth balances, and Commercial Banking has grown its customer base. We have had a strong performance in Global Banking and Markets attributed to capital finance, expansion of our multinational business and new mandates. In fact, year over year, we have increased our overall commitments to customers by 10%. Aside from planned investments in the risk and compliance areas, there has also been good cost discipline across all of our businesses and functions this year. On balance, our strategy to leverage our unique global network on behalf of our customers is delivering largely as expected in a difficult environment. Looking ahead, we are focused on growing our business in Canada, however, we do expect current headwinds to continue including pressure on the oil sector and related industries, and prevailing low interest rates."

Analysis of Consolidated Financial Results for the Third Quarter of 2015

Net interest income for the third quarter of 2015 was C$285m, a decrease of C$18m, or 6%, compared with the third quarter of 2014, and a marginal decrease compared with the second quarter of 2015. Net interest income for the year to date was C$861m, a decrease of C$56m, or 6%, compared with the same period in 2014. The decrease over comparative periods in 2014 was primarily due to the competitive low interest rate environment including the impact of Bank of Canada rate cuts and the impact of the continued planned run-off of the higher yielding consumer finance portfolio. Also contributing to the decrease is the planned run-off of the mezzanine funding portfolio. This was partially offset by increases associated with the growth in commercial loans and residential mortgages. The decrease over the second quarter of 2015 was primarily due to the impact of the second Bank of Canada rate cut and the planned run-off of the consumer finance portfolio, partially offset by growth in residential mortgages and a higher ratio of low interest bearing personal deposits.

Net fee income for the third quarter of 2015 was C$165m, an increase of C$4m, or 2%, compared with the third quarter of 2014 and a decrease of C$16m, or 9%, compared with the second quarter of 2015. Net fee income for the year to date was C$518m, an increase of C$42m, or 9%, compared with the same period in 2014. Net fee income compared to the same periods last year was higher primarily due to increased fees from standby lines of credit and banker's acceptances as well as from higher sales of wealth management products. In addition, year to date there were higher fees from advisory, debt capital market and leveraged and acquisition finance activities, although there was a reduction in these fees in the third quarter of 2015 compared to the second quarter.

Net trading income for the third quarter of 2015 was C$48m, an increase of C$13m, or 37%, compared with the third quarter of 2014, and C$7m, or 17%, compared with the second quarter of 2015. Net trading income for the year to date was C$104m, a decrease of C$3m, or 3%, compared with the same period in 2014. Net trading income increased compared with the third quarter of 2014 and the second quarter of 2015 mainly due to the impact of debit valuation adjustments on derivative contracts arising from the widening of our own credit spreads in the current quarter as well as hedge ineffectiveness recorded in the third quarter of 2014. Derivative fair value movements were recycled to the income statement due to hedge accounting criteria not having been met negatively impacted net trading income for the year to date compared to the same period in 2014, although this was largely offset by the impact of debit valuation adjustments on derivative contracts and lower short positions.

Net income from financial instruments designated at fair value was C$2m for the third quarter of 2015 compared to an expense of C$1m in the third quarter of 2014. The bank has previously designated certain of its own subordinated debentures to be recorded at fair value. The net income from financial instruments designated at fair value results from marginal widening of the bank's own credit spread in the third quarter of 2015 which decreased the fair value of these subordinated debentures. This compares with an expense recorded in comparative periods in 2014, which arose from the narrowing of the bank's own credit spread.

Gains less losses from financial investments for the third quarter of 2015 were C$2m, a decrease of C$5m, or 71%, compared with the third quarter of 2014 and a decrease of C$16m, or 89%, compared with the second quarter of 2015. Gains less losses from financial investments for the year to date were C$56m, an increase of C$3m, or 6%, compared with the same period in 2014. The bank realizes gains and losses from financial investments from disposals of available-for-sale financial investments driven by balance sheet management activities. The variances from comparative periods are primarily as a result of the bank's continuous balance sheet management activities. In the second quarter of 2015 we benefited from higher gains on disposals of financial investments arising from re-balancing of the bank's portfolio.

Other operating income for the third quarter of 2015 was C$16m, little changed from the third quarter of 2014, and C$4m higher than the second quarter of 2015. Other operating income for the year to date was C$46m, an increase of C$4m, or 10%, compared with the same period in 2014, primarily due to income from the sale of an impaired loan portfolio.

Loan impairment charges and other credit risk provisions for the third quarter of 2015 were C$31m, C$14m, or 82%, higher than the third quarter of 2014 and C$8m, or 35%, more than the second quarter of 2015. Loan impairment charges and other credit risk provisions for the year to date were C$70m, unchanged from the same period in 2014. The increases in loan impairment charges over the third quarter of 2014 as well as the second quarter of 2015 are mainly driven by energy sector exposures. We continue to closely manage exposures, including enhancing client monitoring, repricing to compensate for increased risk as well as working with clients to understand their needs in the challenging environment.

As planned, total operating expenses have increased due to our investment in systems, people and processes to meet the highest global standards for detecting and deterring financial crime as well as other costs related to efficiency initiatives. In addition, expenses have also been adversely impacted by the foreign exchange impact of the lower Canadian dollar. As a result, total operating expenses for the third quarter of 2015 were C$298m, an increase of C$26m, or 10% and C$7m, or 2%, compared with the third quarter of 2014 and the second quarter of 2015 respectively. Total operating expenses the year to date was C$875m, C$51m, or 6%, higher than the same period in 2014. General and administrative expenses are higher than in the second quarter of 2015 mainly due to timing of certain expenditures such as marketing, repairs and maintenance as well as increased expenditures in third party services to support risk and compliance related activities.

Share of profit in associates represents changes in the values of bank's investment in certain private equity funds, which for the third quarter was a loss of C$2m.

Income tax expense. The effective tax rate in the third quarter of 2015 was 26.7% unchanged from the third quarter of 2014 and 26.2% little changed compared to the second quarter of 2015.

Movement in Financial Position

Total assets at 30 September 2015 were C$93.6bn, an increase of C$5.4bn from 31 December 2014. New commercial customer and residential mortgage lending grew loans and advances to customers by C$1.7bn. Balance sheet management activities resulted in an increase of C$5.3bn in financial investments, although this was partially offset by a reduction of non-trading reverse repurchase agreements of C$0.9bn. Changes in foreign exchange and interest rates increased derivatives by C$0.7bn. Trading assets were C$1.2bn lower, mainly due to timing of settlements.

Total liabilities at 30 September 2015 were C$88.1bn, an increase of C$4.9bn from 31 December 2014. Customer accounts increased by C$1.0bn, driven primarily by our Retail Banking and Wealth Management business. Balance sheet management activities increased non-trading repurchase agreements and deposits by banks of C$3.2bn and C$1.4bn respectively. Changes in foreign exchange and interest rates increased derivatives by C$1.2bn. Issues of medium term notes, net of maturities, increased debt securities in issue by C$0.8bn. This was partially offset by a reduction in trading liabilities of C$2.3bn primarily related to lower short positions.

Total equity at 30 September 2015 was C$5.5bn, an increase of C$0.5bn from 31 December 2014 due to a second quarter issue of C$0.5bn in preferred shares to an HSBC Group company, profits generated in the period and an increase in other reserves of C$0.2bn. This was offset by the redemption of C$0.2bn in HSBC Canada Asset Trust Securities which reduced non-controlling interests in the second quarter of 2015.

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