
	Business Segments

We have four distinct segments that we utilize for management reporting and analysis purposes, which are generally based upon global business. Our segment results are reported on a continuing operations basis. There have been no changes in the basis of our segmentation or measurement of segment profit as compared with the presentation in our 2011 Form 10-K.

Net interest income of each segment represents the difference between actual interest earned on assets and interest incurred on liabilities of the segment, adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. The objective of these charges/credits is to transfer interest rate risk from the segments to one centralized unit in Global Banking and Markets and more appropriately reflect the profitability of segments.

Certain other revenue and operating expense amounts are also apportioned among the business segments based upon the benefits derived from this activity or the relationship of this activity to other segment activity. These inter-segment transactions are accounted for as if they were with third parties.

Our segment results are presented in accordance with IFRSs (a non-U.S. GAAP financial measure) on a legal entity basis (“IFRSs Basis”) as operating results are monitored and reviewed, trends are evaluated and decisions about allocating resources, such as employees are made almost exclusively on an IFRSs basis since we report financial information to our parent, HSBC in accordance with IFRSs. We continue to monitor capital adequacy, establish dividend policy and report to regulatory agencies on a U.S. GAAP legal entity basis.

Net Interest Income

Effective interest rate - The calculation of effective interest rates under IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”), requires an estimate of changes in estimated contractual cash flows, including fees and points paid or received between parties to the contract that are an integral part of the effective interest rate to be included. U.S. GAAP generally prohibits recognition of interest income to the extent the net interest in the loan would increase to an amount greater than the amount at which the borrower could settle the obligation. Under U.S. GAAP, prepayment penalties are generally recognized as received. U.S. GAAP also includes interest income on loans originated as held for sale which is included in other operating income for IFRSs.

Deferred loan origination costs and fees - Certain loan fees and incremental direct loan costs, which would not have been incurred but for the origination of loans, are deferred and amortized to earnings over the life of the loan under IFRSs. Certain loan fees and direct incremental loan origination costs, including internal costs directly attributable to the origination of loans in addition to direct salaries, are deferred and amortized to earnings under U.S. GAAP.

Loan origination deferrals under IFRSs are more stringent and generally result in lower costs being deferred than permitted under U.S. GAAP. In addition, all deferred loan origination fees, costs and loan premiums must be recognized based on the expected life of the loan under IFRSs as part of the effective interest calculation while under U.S. GAAP they may be recognized on either a contractual or expected life basis.

Derivative interest expense - Under IFRSs, net interest income includes the interest element for derivatives which corresponds to debt designated at fair value. For U.S. GAAP, this is included in gain (loss) on instruments designated at fair value and related derivatives which is a component of other revenues.

Other Operating Income (Total Other Revenues)

Derivatives - Effective January 1, 2008, U.S. GAAP removed the observability requirement of valuation inputs to allow up-front recognition of the difference between transaction price and fair value in the consolidated statement of income (loss). Under IFRSs, recognition is permissible only if the inputs used in calculating fair value are based on observable inputs. If the inputs are not observable, profit and loss is deferred and is recognized (1) over the period of contract, (2) when the data becomes observable, or (3) when the contract is settled.

Unquoted equity securities – Under IFRSs, equity securities which are not quoted on a recognized exchange, but for which fair value can be reliably measured, are required to be measured at fair value. Securities measured at fair value under IFRSs are classified as either available-for-sale securities, with changes in fair value recognized in shareholders’ equity, or as trading securities, with changes in fair value recognized in income. Under U.S. GAAP, equity securities that are not quoted on a recognized exchange are not considered to have a readily determinable fair value and are required to be measured at cost, less any provisions for known impairment, and classified in other assets.

Loans held for sale - IFRSs requires loans originated with the intent to sell to be classified as trading assets and recorded at their fair value. Under U.S. GAAP, loans designated as held for sale are reflected as loans and recorded at the lower of amortized cost or fair value. Under IFRSs, the income related to loans held for sale is reported in trading revenue. Under U.S. GAAP, the income related to loans held for sale is reported similarly to loans held for investment.

For loans transferred to held for sale subsequent to origination, IFRSs requires these receivables to be reported separately on the balance sheet when certain criteria are met which are generally more stringent than those under U.S. GAAP, but does not change the recognition and measurement criteria. Accordingly, for IFRSs purposes such loans continue to be accounted for and impairment continues to be measured in accordance with IAS 39 with any gain or loss recorded at the time of sale. U.S. GAAP requires loans that meet the held for sale classification requirements be transferred to a held for sale category at the lower of amortized cost or fair value. Under U.S. GAAP, the component of the lower of amortized cost or fair value adjustment related to credit risk is recorded in the statement of income (loss) as provision for credit losses while the component related to interest rates and liquidity factors is reported in the statement of income (loss) in other revenues.

IFRS reclassification of fair value measured financial assets during 2008 - Certain securities were reclassified from “trading assets” to “loans and receivables” under IFRSs as of July 1, 2008 pursuant to an amendment to IAS 39 and are no longer marked to market. In November 2008, additional securities were similarly transferred to loans and receivables. These securities continue to be classified as “trading assets” under U.S. GAAP.

Additionally, certain Leverage Acquisition Finance (“LAF”) loans had been classified as trading assets for IFRSs and to be consistent, an irrevocable fair value option was elected on these loans under U.S. GAAP on January 1, 2008. These loans were reclassified to “loans and advances” as of July 1, 2008 pursuant to the IAS 39 amendment discussed above. Under U.S. GAAP, these loans are classified as “held for sale” and carried at fair value due to the irrevocable nature of the fair value option.

Servicing assets – Under IFRSs, servicing assets are initially recorded on the balance sheet at cost and amortized over the projected life of the assets. Servicing assets are periodically tested for impairment with impairment adjustments charged against current earnings. Under U.S. GAAP, servicing assets are initially recorded on the balance sheet at fair value. All subsequent adjustments to fair value are reflected in current period earnings.

Other-than-temporary impairments - Under U.S. GAAP, a decline in fair value of an available-for-sale debt security below its amortized cost may indicate that the security is other-than-temporarily impaired under certain conditions. IFRSs do not have an “other than temporary” impairment concept. Under IFRSs, a decline in fair value of an available-for-sale debt security below its amortized cost is considered evidence of impairment if the decline can, at least partially, be attributed to an incurred loss event that impacts the estimated future cash flows of the security (i.e., a credit loss event). Thus a security may not be considered impaired if the decline in value is the result of events that do not negatively impact the estimated future cash flows of the security (e.g., an increase in the risk-free interest rate). However, until the entity sells the security, it will have to assess the security for credit losses at each reporting date.

Another difference between U.S. GAAP and IFRSs is the amount of the loss that an entity recognizes in earnings on an impaired (other-than-temporarily impaired for U.S. GAAP) available-for-sale debt security. Under U.S. GAAP, if an entity has decided to sell a debt security whose fair value has declined below its amortized cost, or will be more likely than not required to sell the debt security before it recovers its amortized cost basis, it will recognize an impairment loss in earnings equal to the difference between the debt security's carrying amount and its fair value. If the entity has not decided to sell the debt security and will not be more likely than not required to sell the debt security before it recovers its amortized cost basis, but nonetheless expects that it will not recover the security's amortized cost basis, it will bifurcate the impairment loss into a credit loss component and a non-credit loss component, and recognize the credit loss component in earnings and the non-credit loss component in other comprehensive income. Under IFRSs, the entity recognizes the entire decline in fair value below amortized cost in earnings.

REO expense - Other revenues under IFRSs include losses on sale and the lower of amortized cost or fair value of the collateral less cost to sell adjustments on REO properties which are classified as other expense under U.S. GAAP.

Securities -Under IFRSs, securities include HSBC shares held for stock plans at fair value. These shares held for stock plans are measured at fair value through other comprehensive income. If it is determined that these shares have become impaired, the unrealized loss in accumulated other comprehensive income is reclassified to profit or loss. There is no similar requirement under U.S. GAAP.

Loan Impairment Charges (Provision for Credit Losses)

IFRSs requires a discounted cash flow methodology for estimating impairment on pools of homogeneous customer loans which requires the discounting of cash flows including recovery estimates at the original effective interest rate of the pool of customer loans. The amount of impairment relating to the discounting of future cash flows unwinds with the passage of time, and is recognized in interest income. Also under IFRSs, if the recognition of a write-down to fair value on secured loans decreases because collateral values have improved and the improvement can be related objectively to an event occurring after recognition of the write-down, such write-down is reversed, which is not permitted under U.S. GAAP. Additionally under IFRSs, future recoveries on charged-off loans or loans written down to fair value less cost to obtain title and sell are accrued for on a discounted basis and a recovery asset is recorded. Subsequent recoveries are recorded to earnings under U.S. GAAP, but are adjusted against the recovery asset under IFRSs. Under IFRSs, interest on impaired loans is recorded at the effective interest rate on the customer loan balance net of impairment allowances, and therefore reflects the collectibility of the loans.

As discussed above, under U.S. GAAP, the credit risk component of the lower of amortized cost or fair value adjustment related to the transfer of receivables to held for sale is recorded in the consolidated statement of income (loss) as provision for credit losses. There is no similar requirement under IFRSs.

As previously discussed, in the third quarter of 2011 we adopted new guidance under U.S. GAAP for determining whether a restructuring of a receivable meets the criteria to be considered a TDR Loan. Credit loss reserves on TDR Loans are established based on the present value of expected future cash flows discounted at the loans' original effective interest rate.

For loans collectively evaluated for impairment under US GAAP, bank industry practice which we adopted in the fourth quarter of 2012 generally results in a loss emergence period for these loans using a roll rate migration analysis which results in 12 months of losses in our allowance for credit losses. Under IFRSs, we completed a review in the fourth quarter of 2012 which concluded that the estimated average period of time from current status to write-off for loans collectively evaluated for impairment using a roll rate migration analysis was 10 months (previously a period of 7 months was used) which was also adopted in the fourth quarter of 2012.

Operating Expenses

Pension and other postretirement benefit costs - Pension expense under U.S. GAAP is generally higher than under IFRSs as a result of the amortization of the amount by which actuarial losses exceeds the higher of 10 percent of the projected benefit obligation or fair value of plan assets (the “corridor.”). In 2012, amounts include a higher pension curtailment benefit under U.S. GAAP as a result of the decision in the third quarter to cease all future benefit accruals under the Cash Balance formula of the HSBC North America Pension Plan and freeze the plan effective January 1, 2013. In 2011, amounts reflect a pension curtailment gain relating to the branch sales as under IFRSs recognition occurs when “demonstrably committed to the transaction” as compared to U.S. GAAP when recognition occurs when the transaction is completed. Furthermore, in 2010, changes to future accruals for legacy participants under the HSBC North America Pension Plan were accounted for as a plan curtailment under IFRSs, which resulted in immediate income recognition. Under U.S. GAAP, these changes were considered to be a negative plan amendment which resulted in no immediate income recognition.

Share-based bonus arrangements - Under IFRSs, the recognition of compensation expense related to share-based bonuses begins on January 1 of the current year for awards expected to be granted in the first quarter of the following year. Under U.S. GAAP, the recognition of compensation expense related to share-based bonuses does not begin until the date the awards are granted.

Property - Under IFRSs, the carrying amount of property held for own use reflects revaluation surpluses recorded prior to January 1, 2004. Consequently, the carrying amounts of tangible fixed assets and shareholders' equity are lower under U.S. GAAP than under IFRSs. There is a correspondingly lower depreciation charge and higher net income as well as higher gains (or smaller losses) on the disposal of fixed assets under U.S. GAAP. For investment properties, net income under U.S. GAAP does not reflect the unrealized gain or loss recorded under IFRSs for the period. In addition, the sale of our 452 Fifth Avenue property, including the 1 W. 39th Street building in April 2010, resulted in the recognition of a gain under IFRSs while under U.S. GAAP, such gain is deferred and recognized over the lease term due to our continuing involvement.

Litigation accrual - Under U.S. GAAP, litigation accruals are recorded when it is probable a liability has been incurred and the amount is reasonably estimable. Under IFRSs, a present obligation must exist for an accrual to be recorded. In certain cases, this creates differences in the timing of accrual recognition between IFRSs and U.S. GAAP.

Assets

Customer loans (Loans) - As discussed more fully above under "Other Operating Income (Total Other Revenues) - Loans held for sale," on an IFRSs basis loans designated as held for sale at the time of origination and accrued interest are classified as trading assets. However, the accounting requirements governing when receivables previously held for investment are transferred to a held for sale category are more stringent under IFRSs than under U.S. GAAP which results in loans generally being reported as held for sale later then under U.S. GAAP.

Precious metals - Precious metals leased or loaned to customers are reclassified from trading precious metals into loans. Precious metal leases or loans are stated at spot price of the underlying precious metals with changes in value arising from changes in spot price recorded in other income. Interests are recorded as interest income in the consolidated statement of income (loss). Under IFRSs, precious metals leased or loaned to customers continue to be part of the precious metal inventory which is stated at fair value. We take into consideration any financing and leasing arrangement in determining the fair value of precious metals.

Derivatives - Under U.S. GAAP, derivative receivables and payables with the same counterparty may be reported on a net basis in the balance sheet when there is an executed International Swaps and Derivatives Association, Inc. (“ISDA”) Master Netting Arrangement. In addition, under U.S. GAAP, fair value amounts recognized for the obligation to return cash collateral received or the right to reclaim cash collateral paid are offset against the fair value of derivative instruments. Under IFRSs, these agreements do not necessarily meet the requirements for offset, and therefore such derivative receivables and payables are presented gross on the balance sheet.

Goodwill - IFRSs and U.S. GAAP require goodwill to be tested for impairment at least annually, or more frequently if circumstances indicate that goodwill may be impaired. For IFRSs, goodwill was amortized until 2005, however goodwill was amortized under U.S. GAAP until 2002, which resulted in a lower carrying amount of goodwill under IFRSs.

VIEs - The requirements for consolidation of variable interest entities (“VIEs”) under U.S. GAAP are based on both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses, or the right to receive benefits that could potentially be significant to the VIE. As a result, under U.S. GAAP we were determined to be the primary beneficiary of and consolidated a commercial paper conduit effective January 1, 2010. However in the first quarter of 2011, changes involving liquidity asset purchase agreements were made that caused us to no longer be considered the primary beneficiary and this commercial paper conduit was deconsolidated at March 31, 2011. Under IFRSs this conduit was not consolidated.

Results for each segment on an IFRSs basis, as well as a reconciliation of total results under IFRSs to U.S. GAAP consolidated totals, are provided in the following tables.



	IFRS Consolidated Amounts
	RBWM			CMB		GBM			PB			Other			Adjustments/ Reconciling Items			Total			IFRS Adjustments⁽⁴⁾			IFRS Reclassi- fications⁽⁵⁾			U.S. GAAP Consolidated Totals
	(in millions)
December 31, 2012
Net interest income⁽¹⁾	$	854		$	657	$	606		$	184		$	(27	)	$	(15	)	$	2,259		$	(123	)	$	22		$	2,158
Other operating income	555			683		916			106			(442		)	15			1,833			72			17			1,922
Total operating income	1,409			1,340		1,522			290			(469		)	—			4,092			(51		)	39			4,080
Loan impairment charges⁽³⁾	204			4		(1		)	(3		)	—			—			204			73			16			293
	1,205			1,336		1,523			293			(469		)	—			3,888			(124		)	23			3,787
Operating expenses⁽²⁾	1,301			716		997			232			1,464			—			4,710			(36		)	23			4,697
Profit before income tax expense	$	(96	)	$	620	$	526		$	61		$	(1,933	)	$	—		$	(822	)	$	(88	)	$	—		$	(910	)
Balances at end of period:
Total assets	$	22,789		$	24,127	$	208,801		$	8,208		$	91		$	—		$	264,016		$	(67,543	)	$	94		$	196,567
Total loans, net	16,422			19,754		20,679			5,707			—			—			62,562			3,495			(3,446		)	62,611
Goodwill	581			358		480			325			—			—			1,744			484			—			2,228
Total deposits	35,406			21,759		43,951			12,141			—			—			113,257			(5,122		)	9,536			117,671
December 31, 2011
Net interest income⁽¹⁾	$	1,023		$	711	$	504		$	180		$	(83	)	$	(23	)	$	2,312		$	(41	)	$	163		$	2,434
Other operating income	409			453		969			184			336			23			2,374			6			(114		)	2,266
Total operating income	1,432			1,164		1,473			364			253			—			4,686			(35		)	49			4,700
Loan impairment charges⁽³⁾	247			6		5			(30		)	—			—			228			(3		)	33			258
	1,185			1,158		1,468			394			253			—			4,458			(32		)	16			4,442
Operating expenses⁽²⁾	1,653			741		986			261			65			—			3,706			38			16			3,760
Profit before income tax expense	$	(468	)	$	417	$	482		$	133		$	188		$	—		$	752		$	(70	)	$	—		$	682
Balances at end of period:
Total assets	$	28,017		$	21,669	$	213,164		$	6,525		$	92		$	—		$	269,467		$	(80,526	)	$	(115	)	$	188,826
Total loans, net	16,233			16,782		21,390			4,716			—			—			59,121			(4,636		)	(3,361		)	51,124
Goodwill	581			358		480			325			—			—			1,744			484			—			2,228
Total deposits	36,837			21,799		45,061			13,169			—			—			116,866			(4,788		)	27,651			139,729
December 31, 2010
Net interest income⁽¹⁾	$	1,077		$	704	$	638		$	184		$	(11	)	$	(30	)	$	2,562		$	(110	)	$	161		$	2,613
Other operating income	277			455		1,010			132			193			30			2,097			82			1			2,180
Total operating income	1,354			1,159		1,648			316			182			—			4,659			(28		)	162			4,793
Loan impairment charges⁽³⁾	77			115		(180		)	(38		)	—			—			(26		)	30			30			34
	1,277			1,044		1,828			354			182			—			4,685			(58		)	132			4,759
Operating expenses⁽²⁾	1,371			681		724			242			70			—			3,088			94			132			3,314
Profit before income tax expense	$	(94	)	$	363	$	1,104		$	112		$	112		$	—		$	1,597		$	(152	)	$	—		$	1,445
Balances at end of period:
Total assets	$	22,289		$	16,470	$	177,150		$	5,380		$	24		$	—		$	221,313		$	(60,049	)	$	(90	)	$	161,174
Total loans, net	17,474			14,530		25,443			4,683			—			—			62,130			(1,695		)	(11,478		)	48,957
Goodwill	876			368		480			326			—			—			2,050			576			—			2,626
Total deposits	48,385			24,481		33,511			11,337			—			—			117,714			(3,725		)	6,629			120,618

⁽¹⁾

Net interest income of each segment represents the difference between actual interest earned on assets and interest paid on liabilities of the segment adjusted for a funding charge or credit. Segments are charged a cost to fund assets (e.g. customer loans) and receive a funding credit for funds provided (e.g. customer deposits) based on equivalent market rates. The objective of these charges/credits is to transfer interest rate risk from the segments to one centralized unit in Treasury and more appropriately reflect the profitability of segments.


⁽²⁾	Expenses for the segments include fully apportioned corporate overhead expenses.


⁽³⁾	The provision assigned to the segments is based on the segments’ net charge offs and the change in allowance for credit losses.


⁽⁴⁾	Represents adjustments associated with differences between IFRSs and U.S. GAAP bases of accounting. These adjustments, which are more fully described above, consist of the following:



	Net Interest Income			Other Revenues			Provision for Credit Losses			Operating Expenses			(Loss) Income before Income Tax Expense			Total Assets
	(in millions)
December 31, 2012
Unquoted equity securities	$	—		$	—		$	—		$	—		$	—		$	(108	)
Reclassification of financial assets	(64		)	181			—			—			117			(4		)
Securities	—			—			—			(13		)	13			(27		)
Derivatives	(4		)	(5		)	—			—			(9		)	(67,762		)
Loan impairment	(34		)	3			73			—			(104		)	(66		)
Property	(9		)	16			—			(21		)	28			42
Pension costs	—			—			—			11			(11		)	(137		)
Purchased loan portfolios	—			—			—			—			—			—
Servicing assets	—			(1		)	—			—			(1		)	4
Interest recognition	(2		)	—			—			—			(2		)	(4		)
Sale of Cards and Retail Services business	—			(92		)	—			—			(92		)	—
Other	(10		)	(30		)	—			(13		)	(27		)	519
Total	$	(123	)	$	72		$	73		$	(36	)	$	(88	)	$	(67,543	)
December 31, 2011
Unquoted equity securities	$	—		$	—		$	—		$	—		$	—		$	(71	)
Reclassification of financial assets	(37		)	37			—			—			—			187
Securities	—			(18		)	—			(7		)	(11		)	(9		)
Derivatives	(4		)	(7		)	—			—			(11		)	(81,262		)
Loan impairment	(8		)	—			(4		)	—			(4		)	(28		)
Property	(5		)	—			—			(27		)	22			164
Pension costs	—			—			—			48			(48		)	(134		)
Purchased loan portfolios	—			—			—			—			—			3
Servicing assets	—			—			—			—			—			4
Interest recognition	2			—			—			—			2			(3		)
Sale of Cards and Retail Services business	—			—			—			—			—			—
Other	11			(5		)	1			25			(20		)	(623		)
Total	$	(41	)	$	7		$	(3	)	$	39		$	(70	)	$	(81,772	)
December 31, 2010
Unquoted equity securities	$	—		$	—		$	—		$	—		$	—		$	(73	)
Reclassification of financial assets	(148		)	320			19			—			153			187
Securities	—			(103		)	10			—			(113		)	(78		)
Derivatives	(5		)	(7		)	—			2			(14		)	(63,005		)
Loan impairment	(4		)	—			—			(1		)	(3		)	5
Property	(4		)	(56		)	—			(17		)	(43		)	199
Pension costs	—			—			—			120			(120		)	(120		)
Purchased loan portfolios	46			5			35			(1		)	17			18
Servicing assets	—			—			—			1			(1		)	8
Return of capital	—			3			—			—			3			—
Interest recognition	(5		)	—			—			—			(5		)	(6		)
Gain on sale of auto finance loans	—			(38		)	—			—			(38		)	—
Other	10			(42		)	(34		)	(10		)	12			2,816
Total	$	(110	)	$	82		$	30		$	94		$	(152	)	$	(60,049	)


⁽⁵⁾	Represents differences in financial statement presentation between IFRSs and U.S. GAAP.