hsbc bank brasil s.a. - banco múltiplo file3 independent auditors’ report to the board of...

HSBC Bank Brasil S.A. - Banco Múltiplo

Financial statements 30 June 2008 and 2007 (A Free translation of the original report in Portuguese published in Brazil containing financial statements prepared in accordance with accounting practices adopted in Brazil)

2


Financial statements 30 June 2008 and 2007

Contents Independent auditors’ report 3 - 4

Balance sheets 5

Statements of income 6

Statements of changes in shareholders’ equity 7

Statements of changes in financial position 8

Notes on the financial statements 9 - 48

3

Independent auditors’ report To The Board of Directors 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 2008 and 2007 and the related statements of income, changes in shareholders’ equity and changes in financial position for the semesters then ended, which are the responsibility of its management. Our responsibility is to express an opinion on these financial statements.

2. Our examinations were conducted in accordance with auditing standards generally accepted

in Brazil and included: (a) planning of the audit work, considering the materiality of the balances, the volume of transactions and the accounting systems and internal accounting controls of the Bank; (b) verification, on a test basis, of the evidence and records which support the amounts and accounting information disclosed; and (c) evaluation of the most significant accounting policies and estimates adopted by the Bank’s management, as well as the presentation of the financial statements taken as a whole.

3. The Bank records its operations and prepares the financial statements observing the

accounting guidelines established by the Brazilian Central Bank, which require adjustment of the leasing portfolio to present value, by recording a provision for the excess or shortage of depreciation, classified as permanent assets, as mentioned in Note 3 (f). These guidelines require a classification of the operations, in current and long-term assets and liabilities, leased assets and lease income and expenses, that differs from the classification that would be required to be in conformity with the accounting practices adopted in Brazil for financial leasing operations. However, the result of the presentation of the net income for the semesters and shareholders’ equity is in accordance with accounting practices adopted in Brazil before the enactment of Law 11,638/07.

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 2008 and 2007, and the results of its operations, changes in its shareholders’ equity and changes in its financial position for the semesters then ended, in conformity with accounting practices adopted in Brazil before the enactment of Law 11,638/07.

4

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 2008 and 2007, and the corresponding combined statements of income and changes in financial position for the semesters then ended, which are the responsibility of its management. Our responsibility is to express an opinion on these combined financial statements. These combined financial statements, which are not required by Brazilian Corporation Law, were prepared in conformity with rules issued by the Brazilian Central Bank specifically applicable to the preparation of these combined financial statements and to provide additional information, and were subject to the same audit procedures mentioned in paragraph 2 above. In our opinion, based on our examinations, except for the reclassification that would be required as mentioned in paragraph 3 above, the combined financial statements adequately represent in all material respects the combined financial position of HSBC Bank Brasil S.A. - Banco Múltiplo and combined companies (“HSBC Financial Conglomerate”) as of 30 June 2008 and 2007, and the combined results of its operations and changes in its financial position for the semesters then ended, in conformity with rules issued by the Brazilian Central Bank specifically applicable to the preparation of these combined financial statements.

6. As mentioned in note 18.h, Law nº 11,638 was enacted on 28 December 2007 and is effective

as from 1 January 2008. This law amended, revoked and introduced new provisions to Law nº 6,404/76 (Brazilian Corporation Law) and changed the accounting practices adopted in Brazil. Although the mentioned law is already effective, the main changes introduced by it depend on regulations to be issued by the National Monetary Council and the Brazilian Central Bank (BACEN) for them to be implemented by the institutions ruled by them. Accordingly, during this phase of transition, BACEN, through its Communication nº 16,669/08, issued on 20 March 2008, does not require the implementation of all the provisions of Law nº 11,638/07 in the preparation of the interim financial statements in 2008. As a result, the financial statements referred to in paragraphs 1 and 5 were prepared in accordance with specific BACEN instructions and do not contemplate all the changes in accounting practices introduced by Law nº 11,638/07.

8 August 2008 KPMG Auditores Independentes CRC 2SP014428/O-6-F-PR Original in Portuguese signed by José Gilberto Montes Munhoz Accountant CRC 1SP145676/O-5-S-PR


Balance sheets

30 June 2008 and 2007

(In thousands of Reais)

Assets 2008 2007 2008 2007 Liabilities 2008 2007 2008 2007

Current assets 66,993,335 44,366,756 67,210,514 44,435,770 Current liabilities 52,822,054 31,712,033 52,485,834 31,732,577

Cash and cash equivalents 1,232,320 1,231,072 1,232,320 1,231,072 Deposits 24,553,976 18,328,117 22,697,506 17,907,906

Interbank funds invested 12,697,722 8,181,949 12,697,722 8,181,764 Demand deposits 6,453,627 5,260,549 6,449,918 5,258,354 Savings deposits 2,275,288 1,835,604 2,275,288 1,835,604

Money market 10,575,972 6,703,529 10,575,972 6,703,529 Interbank deposits 2,750,964 914,778 898,203 496,762 Interbank placements 2,124,730 1,478,519 2,124,730 1,478,334 Time deposits 13,010,674 10,256,686 13,010,674 10,256,686 Valuation allowance (2,980) (99) (2,980) (99) Other deposits 63,423 60,500 63,423 60,500

Securities and derivative financial instrument 6,935,826 5,506,159 6,941,412 5,529,364 Money market repurchase commitment 1,074,367 2,956,875 1,074,367 2,956,850

Own portfolio 3,432,244 3,184,760 3,437,830 3,295,916 Own portfolio 85,182 218,719 - 51,658 Subject to repurchase commitments 80,453 129,129 80,453 39,752 Third party portfolio 989,185 2,738,156 1,074,367 2,905,192 Derivative financial instruments 868,282 443,020 868,282 443,020 Deposited with the Brazilian Central Bank 1,545,335 1,262,838 1,545,335 1,262,838 Acceptance and endorsements 1,095,156 94,155 1,095,156 94,155 Subject to forward commitments 1,009,512 486,412 1,009,512 487,838

Obligations for notes and bonds issued abroad 543,317 94,155 543,317 94,155 Interbank accounts 7,338,192 5,892,137 7,338,192 5,892,137 Mortgage bonds 551,839 - 551,839 -

Collections in transit 1,030,421 436,184 1,030,421 436,184 Interbank accounts 1,119,827 482,513 1,119,827 482,513 Term deposits

Brazilian Central Bank deposits 6,298,124 5,439,499 6,298,124 5,439,499 Payments in transit 1,110,173 467,693 1,110,173 467,693 National Housing System 5,854 5,984 5,854 5,984 Correspondents 9,654 14,820 9,654 14,820

Correspondents 3,793 10,470 3,793 10,470 Interbranch accounts 656,290 930,008 656,290 930,008

Interbranch accounts 2,229 4,681 2,229 4,681 Third party funds in transit 656,246 929,989 656,246 929,989

Third party funds in transit 128 1,912 128 1,912 Internal transfer of funds 44 19 44 19 Own funds in transit 2,101 2,769 2,101 2,769

Borrowings 4,019,102 1,210,317 4,019,102 1,210,317 Loans 18,517,250 15,798,077 18,528,722 15,798,151

Domestic - Official institutions 2,056 4,111 2,056 4,111 Loans 19,748,561 17,080,407 19,760,149 17,080,481 Foreign 4,017,046 1,206,206 4,017,046 1,206,206

Public sector 65,225 - 65,225 - Private sector 19,683,336 17,080,407 19,694,924 17,080,481 Repass borrowings from public sector - Official institution 802,806 438,443 802,806 438,443

Provision for loan losses (1,231,311) (1,282,330) (1,231,427) (1,282,330) BNDES (Federal Development Bank 61,037 32,432 61,037 32,432

Lease operations 4,060 19,873 4,060 19,873 FINAME (Federal Capital Goods Financing Agency 741,769 406,011 741,769 406,011

Lease receivables - Private sector 544,591 468,374 544,591 468,374 Foreign currency repass borrowings 744,451 124,024 744,451 124,024 Unearned lease income (510,065) (447,277) (510,065) (447,277) Provision for lease operations losses (30,466) (1,224) (30,466) (1,224) Derivative financial instrument 1,104,117 552,434 1,104,117 552,434

Other receivables 19,781,703 7,247,481 19,980,886 7,291,082 Other liabilities 17,651,962 6,595,147 19,172,212 7,035,927

Amounts due from honoured endorsements and guarantee 629 507 629 507 Collection of taxes 349,001 201,974 349,001 201,974 Foreign exchange portfolio 15,888,439 4,968,934 15,888,439 4,968,934 Trade finance 14,937,813 4,500,589 14,937,813 4,500,589 Service fees receivable 120,125 163,660 125,405 153,620 Corporate and statutory contribution 159,234 220,581 162,671 221,775 Securities clearing accounts 37,089 27,533 217,553 73,408 Taxes and social security payable 246,489 275,826 284,717 308,584 Other 3,782,728 2,153,023 3,796,167 2,160,789 Due in connection with securities transaction 15,049 29,087 828,465 369,076 Provision for losses (47,307) (66,176) (47,307) (66,176) Subordinated debts - - 659,100 58,473

Other 1,944,376 1,367,090 1,950,445 1,375,456 Other assets 484,033 485,327 484,971 487,646

Long-term liabilities 39,461,670 32,472,522 39,029,651 31,687,338 Temporary investments 1,330 1,330 1,330 1,330 Other assets 58,676 26,531 59,286 28,577 Deposits 31,502,731 25,437,229 30,874,292 23,842,700 Valuation allowance (4,759) (3,584) (4,759) (3,595) Prepaid expenses 428,786 461,050 429,114 461,334 Interbank deposits 650,080 1,596,133 21,641 1,604

Time deposits 30,852,651 23,841,096 30,852,651 23,841,096 Long-term assets 23,037,913 19,776,730 23,355,824 20,012,406

Money market repurchase commitment 89,983 - 89,983 - Interbank funds invested 289,896 185,312 289,896 185,312

Own portfolio 89,983 - - - Interbank placements 299,070 185,312 299,070 185,312 Third party portfolio - - 89,983 - Provision for losses (9,174) - (9,174) -

Acceptance and endorsements - Obligations for notes anSecurities and derivative financial instrument 8,398,474 8,134,295 8,439,697 8,135,459 bonds issued abroad 97,788 559,661 97,788 559,661

Own portfolio 489,108 2,358,360 527,331 2,367,329 Subject to repurchase commitments 88,176 93,500 88,176 85,695 Borrowings 224,831 160,237 224,831 160,237 Derivative financial instruments 487,283 401,861 487,283 401,861 Deposited with the Brazilian Central Bank 5,928,097 4,429,786 5,929,097 4,429,786 Domestic - Official institutions 18,502 18,502 18,502 18,502 Subject to forward commitments 1,405,810 850,788 1,407,810 850,788 Foreign 206,329 141,735 206,329 141,735

Loans 10,162,453 6,464,054 10,162,453 6,464,054 Repass borrowings from public sector - Official institution 860,851 559,459 860,851 559,459

Loans - Private sector 10,557,553 6,734,379 10,557,553 6,734,379 BNDES (Federal Development Bank 195,651 120,551 195,651 120,551 Provision for loan losses (395,100) (270,325) (395,100) (270,325) FINAME (Federal Capital Goods Financing Agency 665,200 438,908 665,200 438,908

Lease operations (60,998) (20,057) (60,998) (20,057) Derivative financial instrument 405,946 322,964 405,946 322,964

Lease receivables - Private sector 1,976,670 692,661 1,976,670 692,661 Other liabilities 6,279,540 5,432,972 6,475,960 6,242,317 Unearned lease income (1,976,670) (692,661) (1,976,670) (692,661) Provision for lease operations losses (60,998) (20,057) (60,998) (20,057) Trade finance 1,376,922 2,498,098 1,376,922 2,498,098

Taxes and social security payable 699,010 542,619 868,317 718,836 Other receivables 3,342,661 4,430,458 3,619,219 4,664,856 Subordinated debts 1,685,759 780,450 1,685,759 1,387,330

Other 2,517,849 1,611,805 2,544,962 1,638,053 Foreign exchange portfolio 1,376,922 2,616,856 1,376,922 2,616,856 Amounts due from honoured endorsements and guarantee - 211 - 211 Deferred income 60,425 40,141 60,425 40,141 Other 1,974,659 1,819,164 2,252,853 2,055,241 Provision for losses (8,920) (5,773) (10,556) (7,452) Shareholders' equity 5,877,813 4,474,319 5,913,500 4,538,991

Other assets - Prepaid expenses 905,427 582,668 905,557 582,782 CapitalCapital - Domestic - - 33,383 53,213

Permanent assets 8,190,714 4,555,529 6,923,072 3,550,871 Capital - Foreign 2,156,628 2,156,628 2,156,628 2,156,628 Capital reserve 9,145 8,803 9,151 8,809

Investments 2,770,539 2,138,611 1,502,272 1,133,155 Revaluation reserve 4,736 1,259 4,736 1,259 Revenue reserve 268,384 195,493 277,094 196,610

Subsidiaries 2,761,444 2,141,007 1,477,892 1,107,913 Market value adjustment - Securities and derivative financial instrument 144,291 38,808 144,291 38,808 Retained earnings 3,294,629 2,073,328 3,288,217 2,083,664

Domestic 2,761,444 2,141,007 1,477,892 1,107,913

Other investments 11,674 15,344 26,964 42,982 Provision for losses (2,579) (17,740) (2,584) (17,740)

Fixed assets 178,006 206,868 178,158 207,086

Property for own use 88,660 85,099 88,660 85,099 Other fixed assets 361,463 361,914 361,953 362,571 Accumulated depreciation (272,117) (240,145) (272,455) (240,584)

Leased assets 4,727,808 1,760,624 4,727,808 1,760,624

Leased assets 5,055,660 2,078,274 5,055,660 2,078,277 Accumulated depreciation (327,852) (317,650) (327,852) (317,653)

Deferred charges 514,361 449,426 514,834 450,006

Deferred charges 1,003,393 870,299 1,004,456 871,325 Accumulated amortisation (489,032) (420,873) (489,622) (421,319)

Total 98,221,962 68,699,015 97,489,410 67,999,047 Total 98,221,962 68,699,015 97,489,410 67,999,047

See the accompanying notes on the financial statements

HSBCHSBC Bank Financial Conglomerate


5


Statements of income

Semester ended 30 June 2008 and 2007

(In thousands of Reais, except net income per thousand shares)

2008 2007 2008 2007

Income from financial operations 6,453,266 5,605,316 6,456,775 5,606,477

Loans 3,904,945 3,652,356 3,906,384 3,652,358 Lease operations 911,312 360,144 911,312 360,144 Securities 1,251,905 1,365,002 1,253,975 1,366,161 Derivative financial instruments 173,021 (47,728) 173,021 (47,728) Trade finance and foreign exchange - 79,953 - 79,953 Compulsory loans 212,083 195,589 212,083 195,589

Expenses from financial operations (4,335,590) (3,693,538) (4,248,589) (3,621,712)

Deposits, money market and interbank funds (2,567,751) (2,408,047) (2,480,666) (2,336,221) Borrowings and repass (125,810) (66,597) (125,810) (66,597) Lease operations (648,081) (258,807) (648,081) (258,807) Trade finance and foreign exchange (127,201) - (127,201) - Provision for loan losses (866,747) (960,087) (866,831) (960,087)

Net income from financial operations 2,117,676 1,911,778 2,208,186 1,984,765

Other operating income (expenses) (1,260,363) (1,266,531) (1,353,695) (1,306,836)

Service fee income 1,078,221 1,138,964 1,123,031 1,166,797 Personnel expenses (850,490) (861,207) (857,244) (865,913) Other administrative expenses (1,494,917) (1,401,440) (1,505,044) (1,406,344) Transactional taxes (249,701) (260,694) (258,539) (269,630) Equity share in earnings of subsidiaries 395,931 188,714 280,061 131,697 Other income 258,441 151,253 266,912 166,860 Other expenses (397,848) (222,121) (402,872) (230,303)

Operating income 857,313 645,247 854,491 677,929

Non-operating expenses, net 10,263 91,959 66,052 91,266

Income before income and social contribution taxes and profit sharing 867,576 737,206 920,543 769,195

Income and social contribution taxes 41,956 (95,451) (6,192) (123,974)

Current (134,071) (113,732) (194,686) (142,348) Deferred 176,027 18,281 188,494 18,374

Profit sharing (141,655) (97,634) (145,030) (98,324)

Net income for the semester 767,877 544,121 769,321 546,897

Interest on own capital - (125,000) - (125,000)

Number of shares outstanding (thousands) 1,835,473 1,835,473

Net income per thousand shares - R$ 418.35 296.45

See the accompanying notes on the financial statements.

HSBC Bank HSBC Financial Conglomerate

In 30 June 2007, the amount of R$ 89,883 was reclassified from "Other income" to "Loans" at HSBC Bank and at HSBC Financial Conglomerate for comparability purposes.

6


Statements of changes in shareholders' equity (HSBC Bank)



Capital Revaluation Revenue Market valuereserve reserve reserve adjustment -

Securities andCapital Assets in derivative financial Retained

Capital increase Others subsidiaries Legal instruments earnings Total

Balances as of 1 January 2008 2,156,628 - 7,600 4,864 229,990 54,552 2,566,387 5,020,021

Equity adjustment of stock exchange membership certificate - - 1,545 - - - (1,369) 176 Realisation of revaluation reserve - - - (128) - - 128 - Market value adjustments - Securities and derivative financial instruments

Bank - - - - - 90,318 - 90,318 Subsidiaries - - - - - (579) - (579)

Net income for the semester - - - - - - 767,877 767,877 Appropriations from net income

Legal reserve - - - - 38,394 - (38,394) -

Balances as of 30 June 2008 2,156,628 - 9,145 4,736 268,384 144,291 3,294,629 5,877,813

Changes for the semester - - 1,545 (128) 38,394 89,739 728,242 857,792

Balances as of 1 January 2007 2,146,798 - 8,349 1,299 168,287 19,081 1,685,602 4,029,416

Equity adjustment of stock exchange membership certificate - - 454 - - - - 454 Capital increase under approval - 9,830 - - - - - 9,830 Realisation of revaluation reserve - - - (40) - - 40 - Market value adjustments - Securities and derivative financial instruments

Bank - - - - - 13,337 - 13,337 Subsidiaries - - - - - 6,390 - 6,390

Net income for the semester - - - - - - 544,121 544,121 Appropriations from net income

Legal reserve - - - - 27,206 - (27,206) - Dividends - - - - - - (4,229) (4,229) Interest on own capital - - - - - - (125,000) (125,000)

Balances as of 30 June 2007 2,146,798 9,830 8,803 1,259 195,493 38,808 2,073,328 4,474,319

Changes for the semester - 9,830 454 (40) 27,206 19,727 387,726 444,903


Capital

7


Statements of changes in financial position



2008 2007 2008 2007

Source of funds 27,258,244 13,331,915 27,417,445 13,337,497

Net income for the semester 767,877 544,121 769,321 546,897

Adjustments to the net income (124,249) 26,652 (8,268) 83,822

Depreciation and amortisation 681,266 305,270 681,374 305,414 Surplus of lease depreciation (418,520) (102,592) (418,520) (102,592) Equity in earnings of subsidiaries (395,931) (188,714) (280,061) (131,697)

Amortised goodwill 7,496 8,447 7,496 8,447 Other 1,440 4,241 1,443 4,250

Market value adjustment - Securities and derivatives financial instruments 90,318 13,337 90,318 13,337

Changes in deferred income 15,803 5,530 15,803 5,530

Shareholders' equity - 9,830 14 9,833

Payment of capital - 9,830 - 9,830 Reversal of dividends proposed - - 14 3

Third party funds 26,508,495 12,732,445 26,550,257 12,678,078

Increase in current and long-term liabilities 26,187,478 11,778,253 26,268,368 11,737,986

Deposits 9,299,067 4,260,944 9,179,698 4,025,512 Money market repurchase commitments 101,595 300,872 101,595 300,872 Interbank and interbranch accounts 1,042,923 784,606 1,042,923 784,606 Borrowings and repass 2,484,326 820,216 2,484,326 820,216 Derivative financial instruments 682,072 591,745 682,072 591,745 Other liabilities 12,577,495 5,019,870 12,777,754 5,215,035

Decrease in current and long-term assets 40,890 817,668 40,890 817,604

Interbank funds invested - 817,366 - 817,302 Lease operations 40,890 302 40,890 302

Fixed assets and investment disposals 231,090 66,955 236,895 66,956

Fixed assets for own use 245 740 249 741 Lease properties 160,935 48,243 160,935 48,243 Investments 19,250 1,614 25,051 1,614 Fixed assets not for own use 50,660 16,358 50,660 16,358

Dividends received 49,037 69,569 4,104 55,532

Application of funds 27,138,913 13,014,291 27,298,114 13,019,873

Interest on own capital - 125,000 - 125,000

Dividends paid - 4,229 9,667 4,815

Reversal of dividends 97,461 - 49,710 42,562

Variation in the minority interest of HSBC Leasing Arrendamento Mercantil (Brasil) S.A. - - 20,293 20,019

Investment in: 2,104,770 930,835 2,086,280 849,617

Fixed assets 17,641 23,513 17,653 23,538 Leased assets 2,002,741 801,024 2,002,741 801,024 Investments 33,457 88,463 14,955 7,220 Fixed assets not for own use 50,931 17,835 50,931 17,835

Changes in deferred income 61,079 56,383 61,083 56,383

Increase in current and long-term assets 24,495,772 9,460,561 24,691,253 9,484,202

Interbank funds invested 5,330,650 - 5,330,650 - Securities and derivative financial instruments 2,201,191 1,750,917 2,202,938 1,755,458 Interbank and interbranch commitments 1,389,636 701,103 1,389,636 701,103 Loans 3,358,397 2,155,701 3,364,812 2,155,775 Lease operations 12,091,621 4,688,773 12,278,749 4,707,626 Other assets 124,277 164,067 124,468 164,240

379,831 2,437,283 379,828 2,437,275

Increase in cash and cash equivalents 119,331 317,624 119,331 317,624

Changes in financial positionBeginning of the semester 1,112,989 913,448 1,112,989 913,448 End of the semester 1,232,320 1,231,072 1,232,320 1,231,072

Increase in cash and cash equivalents 119,331 317,624 119,331 317,624



Decrease in current and long-term liabilities - Money market repurchase commitments

8


Notes on the financial statements Semester ended 30 June 2008 and 2007 (in thousand of reais)

9

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 under applicable Brazilian law (“banco múltiplo”) with commercial lines covering investments, real estate financing, leasing, consumer credit, finance and investment, trade finance, credit card and investment fund management. Through its subsidiaries, it also operates in insurance, retirement benefit plans, savings plans, brokerage of foreign exchange and securities, securities dealing and asset management.

2 Presentation of the individual and combined financial statements The financial statements for HSBC Bank and HSBC Financial Conglomerate were prepared in accordance with accounting practices adopted in Brazil and rules and the instructions of the Brazilian Central Bank, as mentioned in the note 18.h. 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: 2008 2007 Ownership % Ownership % Companies Direct Indirect Direct Indirect HSBC Investment Bank Brasil S.A. - Banco de Investimento 99.9965 - 99.9965 -HSBC Corretora de Títulos e Valores Mobiliários S.A. - 99.9633 - 99.9633HSBC Leasing Arrendamento Mercantil (Brasil) S.A. 88.8944 - 82.2905 -


Notes on the financial statements (in thousand of reais)

10

A reconciliation of shareholders’ equity as of 30 June 2008 and 2007 and net income for the semesters then ended of HSBC Bank and HSBC Financial Conglomerate is presented below: 2008 2007

Shareholders’

equity

Net incomefor the

semesterShareholders’

equity

Net incomefor the

semester HSBC Bank 5,877,813 767,877 4,474,319 544,121HSBC Leasing Arrendamento Mercantil (Brasil) S.A. 35,533 1,411 64,549 2,711Other minority interests 154 33 123 65 HSBC Financial Conglomerate 5,913,500 769,321 4,538,991 546,897

The balance sheet and 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 semester amounted to R$ 2,268,143, R$ 59,050 and R$ 5,104, respectively (R$ 1,938,197, R$ 64,861 and R$ (1,038), respectively, in 2007).



11

3 Description of significant accounting policies

a. Income statement Income and expenses are recognised on the accrual 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 and deferred charges, goodwill, provision for loan losses, deferred tax assets, provision for contingencies, valuation of securities and derivative financial instruments market value, and assets and liabilities related to employees benefits. The settlement of transactions involving these estimates may result in different amounts due to the estimation inherent in the process of their determination. The Companies within the HSBC Financial Conglomerate review the estimates and assumptions at least semiannualy.

c. Interbank funds invested Securities purchased under resale agreements performed under unrestricted trading contracts are adjusted according to the market value. Other transactions are recorded at the acquisition cost plus the return obtained up to the balance sheet date, net of the provision for devaluation, when applicable.

d. Securities and derivative financial instruments As required by the Brazilian Central Bank Circular nº. 3,068, issued on 8 November 2001, securities are classified into the following categories: d.1 Trading securities - Securities acquired mainly for the purpose of selling them in the

near term. These securities are reported at market value, recorded in the statements of income for the period;

d.2 Securities available for sale - Securities not included in the other categories are carried

at their market values. Adjustments of these instruments to market values, net of income tax, are booked to an account in shareholders’ equity; and



12

d.3 Securities held to maturity - Securities for which the Bank has the intention and financial capability to retain until their respective maturity dates. These investments are stated at cost, plus accrued interest to the balance sheet date. Interest is recorded in the statements of income in the respective periods.

As required by BACEN Circular nº. 3,082, issued on 30 January 2002, the derivatives financial instruments were stated at their market values and changes in their reported values in the statement of income, taking into consideration the specific accounting treatment to be applied to hedging transactions.

e. Loans, time deposits, interbank deposits, savings accounts and other assets and liabilities Transactions subject to predetermined remuneration rates are recorded at redemption value, adjusted to present value in deferred income/expense, respectively. Transactions subject to floating rates are recorded at cost plus interest accrued to the balance sheet date. The up dates for loans overdue until the 59th day are recorded as income, and as form the 60th day as suspended interest, and only, recognized to results when the installments are actually received.

f. Leasing operations Leasing operations are recorded at the value of amounts receivable, restated according to the conditions established in the lease agreements. Unearned lease income relates to contractual installments and the related income is earned on the due date of each installment, in accordance with applicable regulations (Administrative Rule MF nº. 140/84). Any loss at the end of the contract, arising due to the lessee exercising his right to buy, is deferred and amortised (for accounting and tax purposes) over the remaining useful life of the asset leased.



13

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$ 790,749 (R$ 146,349 in 2007). 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 2008 and 2007 would have been presented as follows: HSBC Bank and HSBC Financial Conglomerate 2008 2007

Balancesheet

amount ReclassificationsReclassified

amount Reclassified

amountLease receivables

Current assets (*) 34,526 916,331 950,857 455,476 Long-term assets - 2,413,816 2,413,816 873,708

Leased assets 4,727,808 (4,727,808) - 2,704 Other liabilities - Other

Liability for residual value on leases Current liabilities (45,766) 45,766 - - Long-term liabilities (1,351,895) 1,351,895 - -

Income from lease operations 911,312 (648,081) 263,231 101,337 Expenses on lease operations (648,081) 648,081 - -

(*) Includes, R$ 18,079 (R$ 14,056 in 2007) related to advances paid to supliers, and it is not part of the lease portfolio, as shown in the note 6.a.

g. Provision for loan losses The provision for loan losses was constituted in an amount compatible with the client and credit risk evaluation, in accordance with CMN Resolution 2,682/99. For loan contracts contracted with clients for wich responsability is less than R$ 50, the internal evaluation model is adopted, as provided under CMN Resolution 2,697/00.



14

h. Investments Investments in subsidiaries are accounted for using the equity method. Other investments are recorded at cost, and adjusted, when applicable, by a provision for losses. Goodwill balances originated from acquisitions are supported by appraisal reports issued by independent experts and they are based on the businesses future profitability. The goodwill amortisation is booked based on the businesses future profitability, which is reviewed yearly and does not exceed a ten year period.

i. Fixed assets and deferred charges The property and equipment assets and deferred expenses are stated at cost net of depreciation, amortisation and provision for losses at HSBC Bank in the amount of R$ 749 (R$ 749 in 2007) and at HSBC Financial Conglomerate in the amount of R$ 749 (R$ 784 in 2007). Depreciation was calculated using the straight-line method, applying the following annual rates, which take into account the estimated useful lives of the assets: real estate in use (buildings) - 4%; equipment and communications and security systems - 10%; and transport and data processing systems - 20%. Leasehold improvements are amortised in accordance with the lease term, added for an equal term of renewal. Technology development costs are amortised over five years.

j. Leased assets Depreciation of leased assets was substantially calculated at annual rates equivalent to 70% of the estimated useful lives of the assets, in accordance with regulation 113 from February 1998 of Ministry of Economy (except for assets leased to individuals, which are depreciated over the useful lives of the fixed assets), which are: five years for vehicles and similar and ten years for machinery, equipment, furniture and fixtures.

k. Income and social contribution taxes The provision for income tax was calculated using a rate of 15% of taxable income, plus an additional 10%. The provision for social contribution tax was calculated using a rate of 9% up to April and 15% starting from May of 2008 of income before tax, adjusted according to current legislation.



15

Deferred tax assets related to timing differences for income and social contribution taxes are included in Other receivables - Other and Other liabilities - Taxes and social security payable and reflected in the net income for the period or when applicable in the shareholders’ equity. The deferred tax assets related to timing differences were adjusted by a valuation allowance, when applicable considering the likelihood of realisation in the foreseeable future, not in excess of that permitted by legislation in force.

l. Foreign currency balances Foreign currency balances are recorded at rates ruling at the balance sheet date.

m. Deferred income Includes non-refundable revenues received in advance, represented mainly for annual fees charged to cardholders wich were deferred when billed and taken to income over the life of the service provided. Discounts on payments to establishments participating in the credit card networks were recognised on the date that the purchases of cardholders are validated.


Notes on the financial statements

4 Interbank funds invested

The summary of the account balances as of 30 June 2008 and 2007 is as follow:

HSBC BankHSBC Finance Conglomerate

Within 3 months

From 3 months to 1

yearAbove 1

year 2008

Money market 10,575,972 - - 10,575,972 6,703,529 6,703,529 Backed position 9,550,720 - - 9,550,720 3,965,661 3,965,661 Financed position 1,025,252 - - 1,025,252 2,737,868 2,737,868

Interbank placements 1,108,889 1,012,861 289,896 2,411,646 1,663,732 1,663,547 Interbank placements 702,010 683,266 297,522 1,682,798 1,458,863 1,458,678 Valuation allowance (154) (2,826) (9,174) (12,154) (99) (99) Foreing currency investment 407,033 332,421 1,548 741,002 204,968 204,968

Total 11,684,861 1,012,861 289,896 12,987,618 8,367,261 8,367,076

Current 12,697,722 8,181,949 8,181,764

Long-term 289,896 185,312 185,312

2007


HSBC Bank and HSBC Finance Conglomerate

16



2008 2007 2008 2007 2008 2007 2008 2007

Trading 1,465,206 2,562,014 - - 1,465,206 2,562,014 - - Available for sale 3,845,282 1,553,972 7,875,601 7,699,294 3,849,911 1,576,013 7,916,824 7,699,294 Held to maturity 757,056 947,153 35,590 33,140 758,013 948,317 35,590 34,304 Derivatives 868,282 443,020 487,283 401,861 868,282 443,020 487,283 401,861

Sub-total 6,935,826 5,506,159 8,398,474 8,134,295 6,941,412 5,529,364 8,439,697 8,135,459

Futures 32,836 26,770 - - 32,836 26,770 - -

6,968,662 5,532,929 8,398,474 8,134,295 6,974,248 5,556,134 8,439,697 8,135,459

a. Securities

a.1 Trading

From From 1 From 3 From 5Within 3 3 months to 3 to 5 to 15 Above Market Income Market Income

Papel months to 1 year years years years 15 years value Cost (expenses) value (expenses)

Federal Treasury Bills 137,961 554,779 287,016 - - - 979,756 981,375 (1,619) 956,341 99 National Treasury Bills 873 2,272 196 1,049 - - 4,390 4,391 (1) 5,134 (1)National Treasury Notes 1,761 4,709 245,936 26,756 107,035 221 386,418 399,452 (13,034) 1,561,653 13,903 Foreign Bonds - - - 37,077 - - 37,077 40,857 (3,780) - - Promissoy notes - - - 20,204 - - 20,204 21,940 (1,736) - - Debentures - - - 37,361 - - 37,361 38,991 (1,630) 38,886 (127)

Total 140,595 561,760 533,148 122,447 107,035 221 1,465,206 1,487,006 (21,800) 2,562,014 13,874

2008

The securities presented bellow are stated by their original due dates, in accordance with BACEN circular letter number 3,068, issued on 8 November 2001.

HSBC Bank and HSBC Financial Conglomerate

HSBC Financial Conglomerate

2007


Total

The summary of the account balances as of 30 June 2008 and 2007 is as follows:

Current Long-term

5 Securities and derivative financial instruments

Current Long-term

HSBC Bank

17


Notas explicativas às demonstrações financeiras

a.2.1 - HSBC Bank

From From 1 From 3 From 5 Effect on Effect onOn Within 3 3 months to 3 to 5 to 15 Market shareholders’ Market shareholders’

Papel demand months to 1 year years years years value Cost equity value equity

National Treasury Bills - 17,469 1,076,292 153,317 1,749 48,148 1,296,975 1,294,454 2,521 2,279,577 7,390 Federal Treasury Bills - 1,284,366 - 3,008,754 - - 4,293,120 4,316,363 (23,243) 2,423,829 98,095 Shares of Serasa 43,886 - - - - - 43,886 469 43,417 42,697 42,222 National Treasury Notes - 77,685 - 2,491,456 694,033 1,078,507 4,341,681 4,537,020 (195,339) 4,062,677 193,757 Mortgage bonds - - - - - - - - - 1,805 (18)Foreign Bonds (*) - - 945,505 - - - 945,505 954,147 (8,642) - - Global bonds - - - - 83,223 137,099 220,322 208,323 11,999 263,770 7,680 Debentures - 104,438 31,258 - 40,608 138,707 315,011 321,221 (6,210) 178,911 (279)Promissory notes - - 264,383 - - - 264,383 268,938 (4,555) - -

Total 43,886 1,483,958 2,317,438 5,653,527 819,613 1,402,461 11,720,883 11,900,935 (180,052) 9,253,266 348,847

Current 3,845,282 1,553,972

Long-term 7,875,601 7,699,294

Tax effects 76,566 (129,077)

Net effect on shareholders’ equity (103,486) 219,770 Net effect on equity in subsidiaries - Market value adjustment 5,864 8,901

Total (97,622) 228,671

a.2.2 - HSBC Financial Conglomerate

From From 1 From 3 From 5 Effect on Effect onOn Within 3 3 months to 3 to 5 to 15 Market shareholders’ Market shareholders’

Papel demand months to 1 year years years years value Cost equity value equity

National Treasury Bills - 17,469 1,076,292 166,157 11,752 66,528 1,338,198 1,335,681 2,517 2,297,174 7,397 Federal Treasury Bills - 1,284,366 - 3,008,754 - - 4,293,120 4,316,363 (23,243) 2,423,829 98,095 Shares of Serasa 48,515 - - - - - 48,515 640 47,875 47,141 46,495 National Treasury Notes - 77,685 - 2,491,456 694,033 1,078,507 4,341,681 4,537,020 (195,339) 4,062,677 193,757 Foreign Bonds (*) - - 945,505 - - - 945,505 954,147 (8,642) - - Mortgage bonds - - - - - - - - - 1,805 (18)Global bonds - - - - 83,223 137,099 220,322 208,323 11,999 263,770 7,680 Debentures - 104,438 31,258 - 40,608 138,707 315,011 321,221 (6,210) 178,911 (279)Promissory notes - - 264,383 - - - 264,383 268,938 (4,555) - -

Total 48,515 1,483,958 2,317,438 5,666,367 829,616 1,420,841 11,766,735 11,942,333 (175,598) 9,275,307 353,127

Current 3,849,911 1,576,013

Long-term 7,916,824 7,699,294

Tax effects 74,916 (130,663)

Net effect on shareholders’ equity (100,682) 222,464 Net effect on equity in subsidiaries - Market value adjustment 3,060 6,207

Total (97,622) 228,671

(*) Foreign bonds issued by Austria, indexed to the Turkish Lira, acquired in April 2008 and maturing in March 2009. The effect in the profit and loss was R$ (155,233), classified in trade finance and foreign exchange account and R$ (9,695) classified in securities account.

2008

Semestres findos em 30 de junho de 2008 e 2007

(Em milhares de reais)

a.2 Available for sale

2007

20072008

18


Notas explicativas às demonstrações financeiras

a.3.1 - HSBC Bank

2007

From From 1 From 3 From 5Within 3 3 months to 3 to 5 to 15 Market

Papel months to 1 year years years years Cost value Cost

National Treasury Bills - - - - 7,823 7,823 7,820 8,069 National Treasury Notes 5,888 12,010 14,653 6,746 6,368 45,665 38,405 62,197 Foreign Bonds (*) - 739,158 - - - 739,158 725,921 910,027

Total 5,888 751,168 14,653 6,746 14,191 792,646 772,146 980,293

Current 757,056 947,153

Long-term 35,590 33,140

a.3.2 - HSBC Financial Conglomerate

2007

From From 1 From 3 From 5Within 3 3 months to 3 to 5 to 15 Market

Papel months to 1 year years years years Cost value Cost

National Treasury Bills - - - - 7,823 7,823 7,820 8,069 National Treasury Notes 5,888 12,967 14,653 6,746 6,368 46,622 39,363 64,525 Foreign Bonds (*) - 739,158 - - - 739,158 725,921 910,027

Total 5,888 752,125 14,653 6,746 14,191 793,603 773,104 982,621

Current 758,013 948,317

Long-term 35,590 34,304

2008

The market value of the securities is ascertained using the quoted market price available on the balance sheet date. If no market price quote is available,the amounts are estimated based on the quotes of dealers, price definition models, quote models or price quotes for instruments with similarcharacteristics.

Semestres findos em 30 de junho de 2008 e 2007

(Em milhares de reais)

2008

a.3 Held to maturity

(*) Foreign Bonds issued by Korea Development Bank - KDB in the amount of USD 400 milion, with interest rate of 9.98% p.a. and maturity on 18December 2008.

19



20

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


Notes on the financial statments

(in thousand of reais)

Derivative financial instruments portfolio as of 30 June 2008 and 2007 was presented as follows:

2007 2007

Current Total Total Current Total Total

Swap 757,036 471,182 1,228,218 589,366 959,098 389,455 1,348,553 628,368 Options 80,178 16,101 96,279 221,774 114,302 16,491 130,793 213,307 Forward contracts 31,068 - 31,068 33,741 30,717 - 30,717 33,723

Sub-total 868,282 487,283 1,355,565 844,881 1,104,117 405,946 1,510,063 875,398

Futures 32,836 - 32,836 26,770 13,798 - 13,798 25,904

Total 901,118 487,283 1,388,401 871,651 1,117,915 405,946 1,523,861 901,302

Current 469,790 578,338

Long-term 401,861 322,964

The guarantees of the derivative financial instruments transactions are comprised of securities (Brazilian Government), amounting to R$2,415,322 (R$ 1,337,200 in 2007) in the HSBC Bank and R$ 2,417,322 (R$ 1,338,626 in 2007) in the HSBC Financial Conglomerate.

Liabilities

Long-term Long-term

2008

HSBC Bank e HSBC Financial Conglomerate

2008

Assets

21



The detailed derivative financial instrument position and off balance sheet balances, including the hedge, were presented as follows:

2007

Off balance sheet

Within 3 months

From 3 months to 1 year

Above1 year Market value

Efect on profit and loss

Effect on shareholders'

equity Market value

b.1 Swaps

AssetsInterbank rate x foreign currencies 3,501,582 40,696 106,880 253,388 400,964 (4,096) (1,270) 220,705 Interbank rate x pre fixed 99,601 - 332 270 602 998 - - Interbank rate x other rates 400,000 - - 916 916 909 - - Foreign currencies x pre fixed 968,110 639 1,918 1,564 4,121 17,608 - 6,032 Foreign currencies x interbank rate 21,300 78 - - 78 24 - 3,717 Pre fixed x interbank rate 36,305 10 1 - 11 (7) - 29,996 Pre fixed x foreign currencies 4,839,256 100,234 374,504 176,153 650,891 (130,118) - 252,348 Other rates x interbank rates 120,541 131 1,923 20,178 22,232 12,150 (537) 5,644 Other contracts 3,709,229 74,360 55,330 18,713 148,403 8,039 11,422 70,924

Total 13,695,924 216,148 540,888 471,182 1,228,218 (94,493) 9,615 589,366

LiabilitiesInterbank rate x foreign currencies 2,927,575 (50,206) (69,904) (212,191) (332,301) 13,179 (5) (204,402)Interbank rate x pre fixed 706,970 - (1,320) (1,258) (2,578) (3,957) - (9,541)Interbank rate x other rates 144,171 (1,692) (715) (1,877) (4,284) (3,054) - (40)Foreign currencies x pre fixed 251,439 (134) (903) (1,734) (2,771) (3,920) - (6,228)Foreign currencies x interbank rate 1,265,027 (1,749) (105) - (1,854) (381) (20) (3,512)Pre fixed x interbank rate - - - - - - - (2,839)Pre fixed x foreign currencies 8,220,673 (146,818) (393,005) (104,751) (644,574) 130,033 - (379,203)Other rates x interbank rates 37,001 (2,232) (412) (65) (2,709) (991) - - Other contracts 6,551,986 (71,181) (218,722) (67,579) (357,482) 42,712 (13,972) (22,603)

Total 20,104,842 (274,012) (685,086) (389,455) (1,348,553) 173,621 (13,997) (628,368)

Total (4,382)

Tax effects 1,486

Net effect on shareholders' equity (2,896)

b.2 Interest rate options

AssetsCommitments to sell 3,970,450 291 - - 291 (408) - -

Total 3,970,450 291 - - 291 (408) - -

LiabilitiesCommitments to buy 230,900 (59) - - (59) (50) - - Commitments to sell 3,576,690 (122) - - (122) 239 - -

Total 3,807,590 (181) - - (181) 189 - -

b.3 Foreign currency options

AssetsCommitments to buy 3,033,476 9,488 18,150 10,728 38,366 (64,159) - 105,017 Commitments to sell 4,314,939 20,808 23,174 5,373 49,355 30,702 - 61,742

Total 7,348,415 30,296 41,324 16,101 87,721 (33,457) - 166,759

LiabilitiesCommitments to buy 5,624,868 (10,209) (18,738) (16,491) (45,438) 108,653 - (113,126)Commitments to sell 1,638,899 (36,341) (40,637) - (76,978) (44,975) - (47,323)

Total 7,263,767 (46,550) (59,375) (16,491) (122,416) 63,678 - (160,449)

b.4 Shares options

AssetsCommitments to buy 67,224 - 8,267 - 8,267 (1,279) - 54,835 Commitments to sell - - - - - - - 180

Total 67,224 - 8,267 - 8,267 (1,279) - 55,015

LiabilitiesCommitments to buy 84,207 - (8,196) - (8,196) 1,303 - (52,570)Commitments to sell - - - - - - - (288)

Total 84,207 - (8,196) - (8,196) 1,303 - (52,858)

b.5 Forwards of securities

AssetsCommitments to buy - 7,032 - - 7,032 385 - 10,364 Commitments to sell - 24,036 - - 24,036 - - 23,377

Total - 31,068 - - 31,068 385 - 33,741

LiabilitiesCommitments to buy - (6,647) - - (6,647) - - (10,361)Commitments to sell - (24,070) - - (24,070) (34) - (23,362)

Total - (30,717) - - (30,717) (34) - (33,723)

b.6 Futures (*)

AssetsForeign exchange 3,773,679 12,053 - - 12,053 25,342 2,895 25,127 Interbank rate 3,067,400 20,783 - - 20,783 32,009 438,744 1,643

Total 6,841,079 32,836 - - 32,836 57,351 441,639 26,770

LiabilitiesForeign exchange 8,287,431 (12,589) - - (12,589) (82,007) 845 (23,798)Interbank rate 27,249,500 (1,209) - - (1,209) (2,355) (14,571) (2,106)

Total 35,536,931 (13,798) - - (13,798) (84,362) (13,726) (25,904)

Total 427,913

Tax effects (183,104)

Net effect on shareholders' equity 244,809

(*) Recorded under “Other receivables - Securities clearing accounts and Other liabilities - Due in connection with securities transactions”.

Market value adjustment Assets / (liabilities)



2008

22



The detailed derivative financial instruments position designated as hedges and off balance sheet balances were presented as follows:

2007

Marketvalue adjustment

Off balance sheet

Within3 months

From 3 months to 1

year Above1 year

Market value

Effect on shareholders'

equity Market

value

b.7 Cashflow hedge

b.7.1 Swaps

AssetsInterbank rate x foreign currencies 267,114 5,299 31,840 1,519 38,658 (1,270) 25,729 Pre fixed x foreign currencies 60,929 3,118 1,657 - 4,775 (537) 2,438 Other rates (*) x interbank rate 100,000 - - 20,178 20,178 11,422 4,458

Total 428,043 8,417 33,497 21,697 63,611 9,615 32,625

LiabilitiesForeign currencies x Pre fixed 2,667 - (4) - (4) (20) (224)Foreign currencies x interbank rate 16,500 - (785) - (785) (5) (444)Others rates (*) x interbank rate 937,353 - - (15,617) (15,617) (13,972) (54)

Total 956,520 - (789) (15,617) (16,406) (13,997) (722)

Total (4,382) 31,903

Tax effects 1,486

Effect on shareholders' equity (2,896)

b.7.2 Futures (**)

AssetsForeign currencies 250,724 432 - - 432 2,895 1,083 Interbank rates 478,500 22,113 - - 22,113 438,744 830

Total 729,224 22,545 - - 22,545 441,639 1,913

LiabilitiesForeign currencies 191,028 (133) - - (133) 845 (765)Interbank rates 31,997,000 (140) - - (140) (14,571) (1,717)

Total 32,188,028 (273) - - (273) (13,726) (2,482)

Total 427,913 (569)

Tax effects (183,104)

Effect on shareholders' equity 244,809

(*) Others rates are comprised of inflation rate (IGPM) and US dollar. (**) Recorded under “Other receivables - Securities clearing accounts and Other liabilities - Due in connection with securities transactions”.

Assets/ (liabilities)



2008

23




6 Loan portfolio

a. Composition of loan portfolio by maturity

2007

More Morethan than

Maturity (days) 180 61 - 180 1 - 60 0 - 90 91 - 365 365 Total Total

Loans 271,665 322,815 292,473 3,932,482 4,418,846 4,190,262 13,428,543 10,207,054 Financing 100,758 190,994 213,170 2,499,520 4,476,325 5,073,527 12,554,294 10,733,503 Real estate finance 449 859 2,115 118,653 273,639 857,996 1,253,711 742,360 Agricultural loans 3,757 1,543 4,535 718,574 1,085,313 435,546 2,249,268 1,536,847 Discounted notes 5,822 4,645 6,470 602,936 211,791 222 831,886 595,022 Credits receivable with loan characteristics (a.1) 420 2,109 35,671 2,269,685 717,304 232,095 3,257,284 1,967,018 Lease operations 2,882 8,787 23,376 219,857 677,876 2,413,816 3,346,594 1,315,141 Subtotal 385,753 531,752 577,810 10,361,707 11,861,094 13,203,464 36,921,580 27,096,945

Advances granted to export financing (a.2) 5,981 1,364 28,283 668,630 677,550 - 1,381,808 854,611

391,734 533,116 606,093 11,030,337 12,538,644 13,203,464 38,303,388

388,132 525,837 480,444 8,622,683 9,757,997 8,176,463 27,951,556

(a.1) Mainly related to cards and export credit notes (NCE), recorded in Other receivables - Accounts receivable.(a.2) Mainly related to advances granted to export financing, recorded as Other liabilities - Foreign exchange portfolio.

At 30 June 2008, the HSBC Financial Conglomerate includes margin accounts' balances financed and recorded at HSBC Corretora de Títulos e Valores Mobiliários S.A., amounting R$ 11,588 (R$ 74 in 2007), wich are presented in the instaments not yet due up to 90 days.

Total portfolio in 2007

2008

Overdue installments Installments not yet due

Total portfolio in 2008


24




b. Portfolio by customer type and by economic activity

2008 2007

Industry 7,406,739 4,444,782

Food and drink 2,511,807 1,245,770 Chemical and petrochemical 1,181,674 502,974 Machinery and equipments 582,158 475,949 Paper and cellulose 565,200 655,734 Textile 493,317 329,191 Metallurgy 370,790 275,925 Electricity, gas and water 362,923 209,666 Electronics 253,769 54,026 Wood and furniture 255,385 210,102 Automotive 470,070 169,387 Petroleum and gas 228,150 202,547 Other industry 131,496 113,511

Commerce 5,545,008 4,324,719

Services 3,285,293 2,146,737

Finance 927,673 273,046 Transport 835,118 646,674 Education, health and other social services 426,128 340,784 Telecomunication 253,245 210,303 Other services 843,129 675,930

Construction and real state 2,195,478 1,153,592

Individuals 696,975 485,737 Companies 1,498,503 667,855

Primary sector 473,158 380,355

Agriculture 376,055 314,960 Mining 97,103 65,395

Other individuals (b.1) 19,397,712 15,501,371

38,303,388 27,951,556

(b.1) Other individuals are mainly comprised of credit card transactions, personal credit loans via current accounts and CDC vehicles. At 30 June 2008, the HSBC Financial Conglomerate includes margin accounts' balances financed to individuals and recorded at HSBC Corretora de Títulos e Valores Mobiliários S.A. amounting R$ 11,588 (R$ 74 in 2007).

Total portfolio

HSBC Bank andHSBC Financial Conglomerate

25




c. Loans, leasing, trade finance and other credits by grade

2007

Installments Installmentsoverdue overdue equal to

Installments less than or more than ProvisionGrade not yet due 15 days 15 days Total (c.1) Provision

Grade AA 12,757,147 - - 12,757,147 - 14,395 Grade A 16,182,768 132,529 - 16,315,297 97,357 61,123 Grade B 5,153,058 39,890 87,598 5,280,546 52,950 35,770 Grade C 1,287,933 34,823 103,982 1,426,738 42,837 33,630 Grade D 388,220 15,022 101,192 504,434 50,716 40,036 Grade E 250,135 7,243 106,770 364,148 109,515 81,461 Grade F 173,555 6,011 112,433 291,999 146,019 122,239 Grade G 126,841 6,115 122,998 255,954 179,171 187,544 Grade H 441,200 16,760 637,577 1,095,537 1,095,537 1,069,687

Loan portfolio in 2008 - HSBC Bank 36,760,857 258,393 1,272,550 38,291,800 1,774,102 1,645,885

Grade B (c.2) 11,588 - - 11,588 1,752 1,679

Loan portfolio in 2008 - HSBC Bank HSBC Financial Conglomerate 36,772,445 258,393 1,272,550 38,303,388 1,775,854 1,647,564

Loan portfolio in 2007 - HSBC Bank and HSBC Financial Conglomerate 26,557,143 139,756 1,254,657 27,951,556

2008


(c.2) Refers to margin account's balances financed and recorded at HSBC Corretora de Títulos e Valores Mobiliários S.A. The provisions refers to the HSBC LeasingArrendamento Mercantil S.A., for the sum of R$ 1,636 (R$ 1,679 in 2007) and HSBC Corretora de Títulos e Valores Mobiliários S.A., for the sum of R$ 116.

(c.1.) The provision recorded for HSBC Bank, for the sum of R$ 1,774,102 (R$ 1,645,885 in 2007), and for HSBC Financial Conglomerate, for the sum of R$ 1,775,854(R$ 1,647,564 in 2007) also includes provisions for securities and credits receivable without being characterized as credits, for the amount of R$ 15,623 (R$ 12,237 in2007), and R$ 17,259 (R$ 13,916 in 2007), respectively.

26



27

d. Concentration of loans and credit risk HSBC Bank and

HSBC Financial Conglomerate 2008 2007

Ten largest customers 1,903,272 1,346,568Percentage of the loan portfolio 4.97% 4.82%Next fifty largest customers 3,116,248 1,791,436

Percentage of the loan portfolio 8.14% 6.41%

e. Restructured loans The balance of restructured loans as of 30 June 2008 at HSBC Bank and HSBC Financial Conglomerate amounted to R$ 497,354 (R$ 442,892 in 2007).

7 Provision for loan losses Movements on provision for loan losses, which includes loans, lease operations, other receivables and operations without credit granting characteristics are presented below:

HSBC Bank HSBC

Financial Conglomerate 2008 2007 2008 2007 Balances at beginning of the semester 1,641,971 1,583,717 1,643,688 1,585,470 Charged to profit and loss 866,747 960,087 866,831 960,087 Written off (734,616) (897,919) (734,665) (897,993) Balances at end of the semester 1,774,102 1,645,885 1,775,854 1,647,564 Current 1,309,084 1,349,730 1,309,200 1,349,730 Long-term 465,018 296,155 466,654 297,834 Losses recovered (*) 182,194 129,423 182,194 129,423 (*) The losses recovered are recorded under “Loans” account in the statement of income.



28

8 Foreign exchange portfolio (current and long-term)


2008 2007 Other receivables

Long foreign exchange position 9,244,778 4,453,983 Receivable from foreign exchange short positions 8,116,773 3,266,769 Local currency advances received (127,311) (138,064) Other 31,121 3,102

Total 17,265,361 7,585,790 Current 15,888,439 4,968,934 Long-term 1,376,922 2,616,856 Other liabilities

Payable on foreign exchange bought positions 9,873,305 4,725,258 Short foreign exchange position 7,793,811 3,112,558 Advances granted to export financing (1,346,054) (836,149) Other (6,327) (2,980)

Total 16,314,735 6,998,687 Current 14,937,813 4,500,589 Long-term 1,376,922 2,498,098 Amounts due on open import financing contracts on 30 June 2008 at HSBC Bank and HSBC Financial Conglomerate amounted to R$ 233,134 (R$ 221,206 in 2007), are recorded in off balance sheet accounts.


Notes on the financial statements(In thousands of Reais)

9 Other receivables and other liabilities - Other

Current Long-term Current Long-term Current Long-term Current Long-termOther receivables

Deferred tax (a) 698,063 748,698 415,651 692,263 710,730 801,651 422,731 743,494 Deposits for guarantees 10,370 625,716 9,447 565,190 10,370 835,805 9,447 736,195 Accounts receivable (b) 2,813,704 502,831 1,477,727 532,133 2,813,704 504,467 1,477,727 533,812 Taxes and social contribution credits to be offset 19,806 39,136 136,495 29 20,092 50,903 136,570 11,379 Other 240,785 58,278 113,703 29,549 241,271 60,027 114,314 30,361

Total 3,782,728 1,974,659 2,153,023 1,819,164 3,796,167 2,252,853 2,160,789 2,055,241

Other liabilitiesLiabilities for residual values on leases 45,766 1,351,894 49,053 400,780 45,766 1,351,894 49,053 400,780 Liabilities for official agreements 151,306 - 12,237 187 151,306 - 12,237 187 Due to related parties (c) 38,243 329,836 32,412 385,937 37,980 329,836 36,854 385,937 Accounts payable on behalf of BBB (d) - 121,561 - 168,033 - 121,561 - 168,033 Provision for contingencies 12,032 489,016 23,738 433,431 12,032 506,606 23,738 449,684 Accounts payable 154,817 26,024 66,273 263 159,729 33,926 67,296 7,195 Provision for labour benefits (e) 216,673 179,720 189,926 210,366 217,954 179,720 190,962 210,366 Accounts payable - Credit cards and shopkeepers (f) 1,071,698 - 745,006 - 1,071,698 - 745,006 - Liabilities related to service payments 25,077 - 18,481 - 25,077 - 18,481 - Other 228,764 19,798 229,964 12,808 228,903 21,419 231,829 15,871

Total 1,944,376 2,517,849 1,367,090 1,611,805 1,950,445 2,544,962 1,375,456 1,638,053


2008 20072008 2007

HSBC Bank

29



30

a. Deferred tax related to income tax, social contribution and transactional taxes (PIS and COFINS).

b. Accounts receivable mainly refer to credit card transactions – purchases billable. c. The balances presented as due to related parties, long-term, relate to the diversified payment

rights securitization, amounting to US$ 200,000,000, with the final maturity in 2016 and quarterly amortisations of the interest starting in April 2006 and amortisation of principal amount starting in July 2010. This securitization is subject to Libor, plus a fixed interest element of 0.21% p.a.

d. Accounts payable on behalf of BBB (“Banco Bamerindus do Brasil S.A. - In Extrajudicial

Liquidation”) refer to contingent liabilities against HSBC Group arising from events that occurred during BBB’s management. These contingent liabilities, identified as being the responsibility of BBB, were revised and adjusted, and the responsibilities of the parties in relation to the indemnities were formalised in the Private Instrument of Transaction signed on 25 March 1998. Funds received by the HSBC Bank and not used in settlement of the contractual obligations defined in the Private Instrument will be refunded to BBB when the suits, disputes and other litigation covered by the provision are settled.

e. The provisions for labour benefits are comprised of:


2008 2007 2008 2007 Post-retirement benefits (APABA) - e.1 214,009 216,293 214,009 216,293Vacations, 13th salary and social charges 168,416 167,026 169,697 168,062Other benefits 13,968 16,973 13,968 16,973 Total 396,393 400,292 397,674 401,328 e.1. Post-retirement benefits (APABA) refer to the health plan and life-insurance for employees

joining the Company up until 4 May 1977, and are updated on a monthly basis according to the actuarial estimates of inflation, interest and service cost, reviewed yearly by an independent actuary.



31

f. Credit card obligations relate to amounts payable to Visa, Mastercard and American Express originating from transactions entered into by credit card holders, in the retail network covered by credit card agreements. The obligations to shopkeepers refer to third party finance transactions to purchase goods.



10 Provision for contingencies

a. Type of provisions

Provision for contingencies were presented as follows:

2008 2007 2008 2007

Civil 138,923 107,683 145,409 111,076 Labour 350,345 341,154 353,995 344,990 Tax (*) 127,096 121,043 288,621 292,483 Other 11,780 8,332 19,234 17,356

Total 628,144 578,212 807,259 765,905

Civil claims: Claims for moral and material damages, such as government economic plans,registration of information in classified reference files and others.

Labour claims: Claims by former employees and related risks considered probable, withoutactual claims, demanding payment of overtime, parity of salaries, post retirement and others.

Tax claims: judicial and administrative claims related to Federal, State and Municipal courts.

HSBC Bank ConglomerateHSBC Financial


The Bank and its direct and indirect subsidiaries are part of judicial proceedings in various courtsand government agencies arising from the normal course of business, involving civil, labour, taxand other issues.

The civil, tax and labour provisions are calculated based on individual risk assessments, madeby internal and external legal advisors and are mainly comprised of:

32



b. Changes in provisions

Balances at Balances at01/01/2008 Additions Utilizations Reversal 30/06/2008

Civil 130,612 72,778 (43,641) (20,826) 138,923 Labour 356,044 106,557 (46,723) (65,533) 350,345 Tax (*) 113,190 19,365 - (5,459) 127,096 Other 10,086 1,694 - - 11,780

Total 609,932 200,394 (90,364) (91,818) 628,144

Balances at Balances at01/01/2008 Additions Utilizations Reversal 30/06/2008

Civil 131,257 80,514 (43,641) (22,721) 145,409 Labour 359,777 106,813 (46,746) (65,849) 353,995 Tax (*) 270,111 24,368 - (5,858) 288,621 Other 18,385 2,003 (1,154) - 19,234

Total 779,530 213,698 (91,541) (94,428) 807,259

(*) The civil claims are recorded under "Other liabilities taxes and social security payable".


HSBC Bank

2008


2008

33




HSBC11 Investment in subsidiaries Financial

Conglomerate

HSBC Investment HSBC HSBC HSBC

Bank (Brasil) Leasing AdministraçãoHSBC Brasil S.A. - Administradora Arrendamento Valeu Other de Serviços para Total

Seguros Banco de de Consórcio Mercantil Promotora de investments Fundos de of investments(Brasil) S.A. (a) Investimento Ltda. (Brasil) S.A. Vendas Ltda. (b) Credimatone S.A. (b) in subsidiaries Pensão (Brasil) Ltda. in subsidiaries

30 June 2008

SubsidiariesCapital 550,195 544,646 5,952 300,277 - - - 109,824 Quantity of shares/quotas:

Ordinary shares/quotas 17,131,523 135,008,539 5,951,808 107,148 - - - 11,882,354,656 Preferred shares 9,583,001 - - - - - - -

InvestmentsPercentage holding (%) 97.9487% 99.9965% 99.9999% 88.8944% - - - 99.9999%Net income for the semester 266,413 105,582 7,317 12,702 - - - 2,177 Shareholders' equity 1,220,188 1,113,419 42,650 319,959 - - - 114,253

Equity income in investmentsOperating

HSBC Bank 260,743 105,699 7,317 12,348 - - 9,824 - 395,931 HSBC Financial Conglomerate 260,743 - 7,317 - - - 9,824 2,177 280,061

Balance in investmentsHSBC Bank 1,193,684 (a) 1,113,380 42,650 284,425 72,359 (b) 19,408 (b) 35,538 - 2,761,444 HSBC Financial Conglomerate 1,193,684 (a) - 42,650 - 72,359 (b) 19,408 (b) 35,538 114,253 1,477,892 Provision for losses - - - - - - (1,717) (c) - (1,717)

Transactions with subsidiariesAssets 572 - 89 - - - 2,532 1 Liabilities (12,532) (621,122) (1,212) (977,564) - - (48,781) (110,946) Income 6,368 879 653 206 - - 936 45 Expenses (8,472) (33,010) - (56,388) - - (81,332) (5,733)

30 June 2007

SubsidiariesCapital 350,195 544,646 5,952 300,277 - - - 109,824 Quantity of shares/quotas

Ordinary shares/quotas 17,131,394 135,008,539 5,951,808 99,188 - - - 11,882,354,656 Preferred shares 9,581,711 - - - - - - -

InvestmentsPercentage holding (%) 97.9435% 99.9965% 99.9999% 82.2905% - - - 99.9999%Net income for the semester 110,980 47,701 5,558 13,861 - - - 1,940 Shareholders' equity 830,937 842,910 28,660 364,487 - - - 109,724

Equity income in investmentsOperating

HSBC Bank 108,695 47,807 5,558 11,150 - - 15,504 - 188,714 HSBC Financial Conglomerate 108,695 - 5,558 - - - 15,504 1,940 131,697

Balance in investmentsHSBC Bank 814,193 842,880 28,660 299,938 83,936 22,393 49,007 - 2,141,007 HSBC Financial Conglomerate 814,193 - 28,660 - 83,936 22,393 49,007 109,724 1,107,913 Provision for losses - - - - - - (16,878) - (16,878)

Transactions with subsidiariesAssets 26,969 11,329 120 2,894 - - 148 1 Liabilities (8,938) (608,317) (311) (1,032,984) - - (37,728) (105,859) Income 5,501 712 865 212 - - 901 46 Expenses (8,223) (34,941) - (63,276) - - (99,762) (6,080)

Notes:a. Includes, R$ 59 related to premium based on future profits, which is being amortised over ten years.b. The balances in investments related to premiums based on future profits in the amount of R$ 91,767, wich are being amortized over ten years origination from the merge of Valeu Promotora de Vendas Ltda. and Credimatone S.A. incorpored by HSBC Bank.c. The balance reported in the balance sheet for "Provision for losses" includes the amount of R$ (862) for the provision for other investments.

HSBC Bank

34



35

12 Related party transactions The HSBC Bank entered into transactions with related companies, at standard market rates and conditions. The outstanding balances, and income and expenses for the semester, relating to these transactions were as follows:

HSBC Bank HSBC Financial

Conglomerate 2008 2007 2008 2007 Assets Swap 126,444 51,176 126,444 51,175 Foreign deposits - Foreign currency 254,187 383,740 254,187 383,740 Foreign investments 739,854 194,659 739,854 194,659 Dividends receivable 806 41,893 806 27,855 Other assets 19,421 5,732 19,427 5,556 Total 1,140,712 677,200 1,140,718 662,985 Liabilities Swap 276,309 68,134 276,309 68,134 Demand deposits 29,639 18,008 25,928 15,811 Time deposits 250,102 203,866 250,102 203,866 Interbank deposits 2,481,200 2,012,545 - - Money market repurchase commitments 175,165 926,979 175,165 167,036 Foreign currency and repass borrowings 3,157,425 1,079,993 3,157,425 1,079,993 Due to related parties 368,079 418,350 367,816 422,506 Dividends payable 156 106,406 156 106,989 Other liabilities 742 579 742 580 Total 6,738,817 4,834,860 4,253,643 2,064,915 Income Interbank deposits income - 15 - - Swaps income 196,051 48,019 196,051 48,019 Foreign investments income 1,686,802 304,244 1,686,802 304,244 Service fee income 29,918 18,873 28,833 17,968 Rentals income 931 958 895 941 Other income 12 13 298 13 Total 1,913,714 372,122 1,912,879 371,185



36

HSBC Bank HSBC Financial

Conglomerate 2008 2007 2008 2007 Expenses Interbank deposits expenses (123,642) (112,521) - - Time deposits expenses (24,917) (11,393) (24,917) (11,393) Swaps expenses (287,453) (76,089) (287,453) (76,089) Money market repurchase commitments expenses (9,344) (8,984) (9,330) (8,990) Foreign currency and repass borrowings expenses (1,194,909) (20,892) (1,194,909) (20,892) Service fee expenses (108,984) (144,342) (107,608) (143,314) Rentals expense (30,797) (27,180) (30,926) (27,291) Other expenses (2,484) (15,527) (2,484) (15,527) Total (1,782,530) (416,928) (1,657,627) (303,496)



13 Money market repurchase commitments, borrowings, repass borrowings and subordinated debts

The accounting balances composition as of 30 June 2008 and 2007 is as follows:

On demand Within 1 year Above 1 year 2008 2007

Deposits (a) 8,728,915 15,825,061 31,502,731 56,056,707 43,765,346 Money market repurchase - 1,074,367 89,983 1,164,350 2,956,875 Acceptance and endorsements (b) - 1,095,156 97,788 1,192,944 653,816 Borrowings and repass borrowings (c) - 5,566,359 1,085,682 6,652,041 2,492,480 Subordinated debts (d) - - 1,685,759 1,685,759 780,450

Total 8,728,915 23,560,943 34,461,943 66,751,801 50,648,967

Current 23,151,931

Long-term 27,497,036

On demand Within 1 year Above 1 year 2008 2007

Deposits (a) 8,725,206 13,972,300 30,874,292 53,571,798 41,750,606 Money market repurchase - 1,074,367 89,983 1,164,350 2,956,850 Acceptance and endorsements (b) - 1,095,156 97,788 1,192,944 653,816 Borrowings and repass borrowings (c) - 5,566,359 1,085,682 6,652,041 2,492,480 Subordinated debts (d) - 659,100 1,685,759 2,344,859 1,445,803

Total 8,725,206 22,367,282 33,833,504 64,925,992 49,299,555

Current 22,790,168

Long-term 26,509,387

(a) The time deposits in the HSBC Bank and HSBC Financial Conglomerate amounting R$ 43,863,325 (R$ 34,097,782 in 2007) mature up to December2016, with an average interbank interest rate for a substancial position of its portfolio.


(b) Comprised by certificates of deposits amounting US$ 402,730 thousand (US$ 339,433 thousand in 2007) maturing up to April 2010. Thesecertificates of deposit are subject to pre-fixed interest rates from 2.91% to 6.02% p.a. plus exchange rate, payable at the end of the contract (from 4.76%to 6.25% p.a. plus exchange rate variation in 2007).


HSBC Bank

37



c. Borrowings and repass borrowings

Within 1 year Above 1 year 2008 2007

Borrowings 4,019,102 224,831 4,243,933 1,370,554 Domestic 2,056 18,502 20,558 22,613 Foreign 4,017,046 206,329 4,223,375 1,347,941

Repass borrowings 1,547,257 860,851 2,408,108 1,121,926

Domestic - Official institutions 802,806 860,851 1,663,657 997,902

BNDES (Federal Development Bank) 61,037 195,651 256,688 152,983 FINAME (Federal Capital Goods Financing Agency) 741,769 665,200 1,406,969 844,919

Foreign 744,451 - 744,451 124,024

Total 5,566,359 1,085,682 6,652,041 2,492,480

Current 1,772,784

Long-term 719,696

Foreign Repass borrowings - Funds in foreign currencies were obtained from foreign banks and investors, in accordance with BACEN Resolution nº.2,770, for repassing to customers, with due dates exchange up to November 2009. These borrowings are subject to US$ exchange rate plus interest rateof 5% p.a. and YEN exchange rate plus interest rate ranging from 0.90% to 1.52% p.a. (interest rate from 3.92% to 6.07% in 30 June 2007).

Domestic Repass borrowings - Funds obtained from BNDES - Banco Nacional de Desenvolvimento Econômico e Social (Brazilian DevelopmentBank), were repassed to customers for the purpose of financing the acquisition of machinery and equipment (FINAME), as well as for other investmentsin fixed assets. These borrowings are subject to Long Term Interest Rate (TJLP), plus interest from 0.50% to 9.65% p.a. and prefixed contracts withinterest from 4.95% to 11.00% p.a., with due dates up to 2018, (4.95% to 13.95% p.a. in 30 June 2007).



Foreign currency borrowings - Funds from trade finance operations related to export and import financing, with due dates up to July 2011 and interestrates ranging from 2.00% to 5.57% p.a. plus exchange rate (from 4.55% to 5.83% p.a. in 30 June 2007).

38



d. Subordinated debt

Above 1 year 2008 2007

Certificates of deposits (CD) 1,685,759 1,685,759 780,450

Total 1,685,759 1,685,759 780,450

Long-term 780,450

Within 1 year Above 1 year 2008 2007

Certificates of deposits (CD) - 1,685,759 1,685,759 780,450 Debentures 659,100 - 659,100 665,353

Total 659,100 1,685,759 2,344,859 1,445,803

Current 58,473

Long-term 1,387,330

Issue valueInterest accrued Total Remuneration Maturity

200,000 76,537 276,537 106.00% of interbank rate 12/28/2015500,000 95,928 595,928 100% of interbank rate + 0.55% p.a 12/20/2016250,000 21,637 271,637 100% of interbank rate + 0.5% p.a. 9/26/2014200,000 16,865 216,865 100% of interbank rate + 0.46% p.a 10/5/2012

50,000 4,185 54,185 100% of interbank rate + 0.5% p.a. 10/6/2014250,000 20,607 270,607 100% of interbank rate + 0.46% p.a 10/15/2012

Total 1,450,000 235,759 1,685,759

In the HSBC Financial Conglomerate this amount comprises R$ 608,029 (R$ 608,029 in 2007) referring to the funds obtained through the issuanceof debentures by the subsidiary HSBC Leasing Arrendamento Mercantil (Brasil) S.A., subject to the variation of the interbank rate plus 0.80 % p.a.maturing in October 2008 and with interest paid annually (classified in current liabilities), which as of 30 June 2008 amounted to R$ 51,071 (R$57,324 in 2007). As established by BACEN Resolution 2,837, this liability comprises the reference shareholders' equity for calculating a number of operating limits.

Funds obtained from the issue of Subordinated Bank Deposit Certificates, for the amount of R$ 1,450,000 and interest payable at 30 June 2008, for theamount of R$ 235,759, being:



HSBC Bank

39




14 Income tax and social contribution

a. Current semester tax charge

2008 2007 2008 2007

Net income before income taxes(after profit sharing) 725,921 639,572 775,513 670,871

Income and social contribution taxes charge at the nominal ratesmentioned in the note 3k (276,143) (217,454) (289,348) (228,096)

Permanent deductions (additions) 170,848 117,706 124,802 99,372

Equity share in earnings of subsidiaries 160,350 64,078 113,913 44,693 Interest on own capital - 42,500 - 42,500 Income and revenue abroad (4,250) (1,685) (4,250) (1,685) Other 14,748 12,813 15,139 13,864

Other adjustments 147,251 4,297 158,354 4,750

Adjustment in tax losses and social contribution from previous years - 2,022 - 2,022 Increase in social contribution from 9% to 15% 145,412 - 155,925 - Other 1,839 2,275 2,429 2,728

Income and social contribution taxes charged toincome for the period 41,956 (95,451) (6,192) (123,974)

b. Income and social contribution taxes reported in the statements of income

2008 2007 2008 2007

Current taxes

Income and social contribution taxes due (134,071) (113,732) (194,686) (142,348)

Deferred taxes 176,027 18,281 188,494 18,374

Tax credits taken/realised on timing differences 30,615 18,281 32,569 18,374 Increase in social contribution from 9% to 15% 145,412 - 155,925 -

Total 41,956 (95,451) (6,192) (123,974)

HSBC Bank Financial Conglomerate


HSBC

40




c. Origin of deferred tax assets

Balances as of Constitution/ Balances as of Balances as of Constitution/ Balances as of31/12/07 (realisation) 30/06/08 31/12/07 (realisation) 30/06/08

Deferred tax assets

Provision for tax, labour and civil contingencies 197,473 49,175 246,648 206,135 53,724 259,859 Profit sharing provision 71,478 (7,848) 63,630 73,434 (8,535) 64,899 Provision for loan losses 528,648 128,128 656,776 529,263 128,224 657,487 Valuation allowance on securities and interbank

funds portfolios 167,558 162,575 330,133 167,558 162,575 330,133 Goodwill 35,161 (1,316) 33,845 35,161 (1,316) 33,845 Other 41,190 34,569 75,759 44,101 35,196 79,297

Deferred tax on timing differences 1,041,508 365,283 1,406,791 1,055,652 369,868 1,425,520

Tax loss carryforwards - - - 39,008 7,883 46,891

Total deferred tax assets 1,041,508 365,283 1,406,791 1,094,660 377,751 1,472,411

Deferred tax liabilities

Surplus lease depreciation (92,382) (104,621) (197,003) (92,382) (104,621) (197,003) Market value adjustment on securities, interbank and derivatives (238,339) (153,492) (391,831) (239,984) (153,295) (393,279) Other - - - (4,968) (1,053) (6,021)

Total deferred tax liabilities (330,721) (258,113) (588,834) (337,334) (258,969) (596,303)

Deferred tax, net 710,787 107,170 817,957 757,326 118,782 876,108

Balances as of Constitution/ Balances as of Balances as of Constitution/ Balances as ofDeferred assets 31/12/06 (realization) 30/06/07 31/12/06 (realization) 30/06/07

Provision for tax, labour and civil contingencies 155,767 26,841 182,608 171,763 26,600 198,363 Profit sharing provision 58,768 (19,827) 38,941 59,244 (20,108) 39,136 Provision for loan losses 464,610 67,884 532,494 465,259 67,859 533,118 Valuation allowance on securities and interbank

funds portfolios 157,076 75,577 232,653 157,076 75,577 232,653 Goodwill 47,946 (6,392) 41,554 47,946 (6,392) 41,554 Other 41,719 4,579 46,298 43,809 5,218 49,027

Deferred tax on timing differences 925,886 148,662 1,074,548 945,097 148,754 1,093,851

Tax loss carryforwads - - - 39,008 - 39,008

Total deferred tax assets 925,886 148,662 1,074,548 984,105 148,754 1,132,859

Deferred tax liabilities

Surplus lease depreciation (10,891) (25,004) (35,895) (10,891) (25,004) (35,895) Market value adjustment on securities, interbank and derivatives (305,050) (112,280) (417,330) (305,056) (113,663) (418,719) Other - - - (3,464) (1,199) (4,663)

Total deferred tax liabilities (315,941) (137,284) (453,225) (319,411) (139,866) (459,277)

Deferred tax, net 609,945 11,378 621,323 664,694 8,888 673,582



41




d. Projected realisation of deferred tax assets on timing differences and tax losses

HSBC Bank

2007

Income SocialYear tax contribution Total Total

2007 - - - 206,651 2008 212,128 127,257 339,385 407,195 2009 287,873 172,637 460,510 197,140 2010 240,169 144,047 384,216 149,615 2011 42,425 25,321 67,746 29,891 2012 48,009 28,764 76,773 46,287 2013 29,922 16,377 46,299 7,527 2014 11,116 6,570 17,686 24,028 2015 2,870 1,671 4,541 2,246 2016 4,708 2,167 6,875 3,376 2017 1,731 1,026 2,757 592 2018 2 1 3 -

Total 880,953 525,838 1,406,791 1,074,548


2007

Income Social Income SocialYear tax contribution tax contribution Total Total

2007 - - - - - 210,375 2008 213,603 128,143 1,888 1,133 344,767 413,815 2009 289,265 173,471 4,681 2,809 470,226 203,885 2010 243,553 146,478 5,132 3,079 398,242 157,360 2011 43,769 26,117 5,358 3,215 78,459 42,411 2012 49,856 29,920 6,021 3,613 89,410 57,833 2013 30,627 16,799 4,104 4,023 55,553 14,123 2014 11,436 6,767 - 1,835 20,038 25,632 2015 3,408 1,994 - - 5,402 2,709 2016 5,028 2,358 - - 7,386 3,985 2017 1,816 1,077 - - 2,893 731 2018 22 13 - - 35 -

Total 892,383 533,137 27,184 19,707 1,472,411 1,132,859

2008

The present value of the deferred tax assets amounted to R$ 1,171,093 (R$ 885,280 in 2007), taking into consideration theinterbank rate, of which R$ 1,139,102 (R$ 859,245 in 2007) consist of timing differences and R$ 31,991 (R$ 26,035 in2007) consist of tax losses.

The present value of the deferred tax assets amounted to R$ 1,125,957 (R$ 847,820 in 2007), taking into consideration theinterbank rate, which relates to timing differences.

2008

Timing differences

Timing differences Tax losses

42



43

15 Capital and dividends The Bank’s capital as of 30 June 2008 was R$ 2,156,628 (R$ 2,156,628 in 2007), and was represented by 1,835,472,780 ordinary shares (1,835,472,780 in 2007), with no par value. The foreign capital registered at the Brazilian Central Bank is US$ 1,118,398,107, EUR 41,626,786 and GBP 131,800,518 (US$ 1,118,398,107, EUR 41,626,786, and GBP 131,800,518 in 2007, respectively). According to the HSBC Bank’s statutes, shareholders have the right to receive a minimum dividend of 25% of adjusted net income, in accordance with local legislation. The Board of Directors has the authority to determine interim dividend distributions.


Notes on the financial statements(In thousands of Reais)

16 Other administrative expenses

2008 2007 2008 2007

(56,130) (36,570) (57,664) (39,326) (109,204) (101,836) (109,307) (101,929) (140,939) (124,489) (141,298) (124,725) (54,736) (57,202) (54,794) (57,232) (150,745) (152,792) (150,994) (153,126) (61,119) (73,501) (61,375) (73,670) (99,685) (93,497) (99,485) (93,310) (93,424) (85,295) (93,532) (85,439) (60,039) (59,541) (60,093) (59,586) (36,196) (32,525) (36,209) (32,532) (428,786) (410,802) (429,095) (411,090) (203,914) (173,390) (211,198) (174,379)

(1,494,917) (1,401,440) (1,505,044) (1,406,344)

Transportation/travel

Third party service expensesOthers

Total

Financial system service expensesDepreciation and amortisationAdvertising and marketingSecurity and surveillance services

RentalCommunicationsAsset maintenance and conservationData processing


Specialised technical services

44




17 Other operating income and expenses

2008 2007 2008 2007

7,685 4,961 7,721 4,961 19,490 25,462 26,156 32,806 114,434 47,617 115,948 52,115 8,146 9,395 8,146 9,395 72,564 45,304 72,564 45,304 28,557 5,678 28,557 5,678 7,565 12,836 7,820 16,601

258,441 151,253 266,912 166,860

(33,184) (8,080) (33,184) (8,080) (82,908) (31,179) (82,196) (30,472) (9,725) (6,217) (15,359) (13,478) (132,803) (91,939) (132,803) (91,939) (25,021) (682) (25,021) (682) (70,349) (40,223) (70,349) (40,223) (6,625) (6,966) (6,625) (6,966) (37,233) (36,835) (37,335) (38,463)

(397,848) (222,121) (402,872) (230,303)

Discounts grantedExpenses with credit card operations

Other

Monetary variation on accounts payable to BBB Foreign exchange variationAdditions of provisions

Provision for guarantees not honored


Other expenses

Total

Revenue from credit portfolio sold

Other incomeRecovery of expenses and chargesInterest on judicial depositsReversal of operating provisionsDiscounts received Revenue from export notes - NCE

Other

Total

Commissions on securities dealings

45



46

18 Supplementary information a. Guarantees and endorsements

The balance of guarantees and endorsements given to third parties amounted to R$ 3,234,486 in HSBC Bank and HSBC Financial Conglomerate (R$ 1,778,446 in 2007).

b. Non-operating income Non-operating income in HSBC Financial Conglomerate is substantially related to the sale of shares of Bovespa Holding S.A. in the amount of R$ 51,348, profit on the sale of BM&F S.A. shares in the amount of R$ 4,123, profit on the sale of Mastercard shares in the amount of R$ 4,051, profit on the sale of Visa shares in the amount of 19,352 and losses on the disposal of assets for resale and other operational losses in the amount of R$ (12,822). In 2007, refers to the profit obtained on the parcial sale of 68.46% of its equity interest in Serasa S.A. to Experían Brasil Aquisições Ltda., to the amount of R$ 101,195 and losses on the sale of fixed assets not for own use and other nonoperating losses.

c. Management of mutual investment funds HSBC Bank and the companies forming part of the HSBC Financial Conglomerate manage investment funds, whose shareholders' equity as of 30 June 2008 totalled R$ 64,789,717 (R$ 59,946,728 in 2007), manage portfolios in the amount of R$ 907,852 (R$ 953,238 in 2007) and investment clubs with equity of R$ 29,313 (R$ 42,195 in 2007).

d. Prepaid expenses Prepaid expenses refer mainly to amounts paid in advance for exclusive contracts for banking services and commission paid to third parties for business intermediary services, and are appropriated over the remaining period of the contracts.



47

The composition and forecast amortization of the amounts recorded by HSBC Bank in 2008, are presented below: 2008 2007 Projected amortization

Accounting

balances

Within 3

months

From 3 months to

1 year Above 1

year Accounting

balances Commission for business

intermediary services 959,644

129,614

255,866 574,164 704,943 Preferential and exclusive contracts

for providing banking services 374,569

10,234

33,072 331,263 338,775 Total 1,334,213 139,848 288,938 905,427 1,043,718

e. Post-retirement pension benefits HSBC Bank and the companies of the HSBC Financial Conglomerate sponsor a supplementary pension plan for their employees. The plan is a defined contribution plan, based on a financial capitalisation system, and was set up in 2001. The contributions during the semester amounted to R$ 7,266 (R$ 5,174 in 2007).

f. Insured assets HSBC Financial Conglomerate has asset insurance coverage for its assets in amounts considered sufficient to cover possible losses.

g. Shareholders’ equity requirement (Basle Agreement) HSBC Bank maintains shareholders’ equity compatible with the degree of risk associated with its asset structure, assessed on a combined basis together with the financial companies which comprise the HSBC Financial Conglomerate, under the terms of BACEN Resolution 3,490/07 and subsequent rules.



48

h. Changes in the Brazilian Corporate Law (Law nº 6,404/76) Law 11638, which became effective as from 1 January 2008, was enacted on 28 December 2007. This law amended, revoked and introduced new provisions to Law 6404/76 (Corporate Law). Eventhough this law has already become effective, the main modifications introduced by it are pending regulation by the regulatory agencies to be applied by the companies. BACEN, through Communiqué 16669 of 30 March 2008, established that the effects of the new law shall only be carried out in the annual financial statements. Company Management performed a preliminary evaluation of the potential impacts of the modifications introduced by the new law and believes that, as of 30 June 2008, no significant effects are expected on the shareholders’ equity or statement of income. Nevertheless, Company Management is monitoring the regulations that are disclosed by the regulatory agency in order to reach a definite conclusion on the effects of the aforementioned Law.

i. Change in the rate for Tax on Financial Operation - IOF

Decrees 6,339 and 6,345, published in January 2008, have altered the rate for IOF – Financial Operations Tax, due on credit, foreign exchange, insurance and security operations, effective as from January 4, 2008.

hsbc bank brasil s.a. - banco múltiplo file3 independent auditors’ report to the board of...

Documents